Exhibit 20A-2 Macro AD/AS Models

In Panel (a) of Exhibit 20A-2, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the federal government or Fed decides to intervene, it would most likely:

Question

Exhibit 20A-2 Macro AD/AS Models

In Panel (a) of Exhibit 20A-2, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the federal government or Fed decides to intervene, it would most likely:

Quizplus · Accepted Answer

To increase real GDP and shift the economy to a new equilibrium point, the government or Fed can increase the level of government spending for goods and services. This will shift the aggregate demand curve to the right, leading to an increase in both real GDP and price level. Alternatively, decreasing the money supply or increasing taxes would lead to a decrease in aggregate demand, resulting in a lower real GDP and price level. Decreasing the level of government spending for goods and services would also decrease aggregate demand, leading to a similar outcome.