Exhibit 20A-1 Policy Alternatives In Panel (b) of Exhibit 20A-1, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the federal government decides to intervene, it would most likely: A) increase taxes. B) decrease the money supply. C) increase the level of government spending for goods and services. D) decrease the level of government spending for goods and services.

Question

Quizplus · Accepted Answer

To increase the level of real GDP from Y₁ to YF1U1B11F1U1B0, the government needs to increase aggregate demand. One way to achieve this is by increasing government spending for goods and services, which will lead to an increase in aggregate demand and a shift in the aggregate demand curve to the right. This will increase both real GDP and the price level, leading to the new equilibrium point at YF1U1B11F1U1B0 and PS2U1B12F1U1B0. Therefore, choice C is the best option. The other options would either decrease aggregate demand or have a neutral effect on aggregate demand, leading to no change in real GDP or a decrease in real GDP.

Exhibit 20A-1 Policy Alternatives in Panel (B) of Exhibit 20A-1