The federal government increases spending by $50 billion and the main effect is an increase in the price level.It must be t that the economy is operating on the

Question

Quizplus · Accepted Answer

An increase in government spending will shift the aggregate demand curve to the right, causing an increase in both output and the price level. However, if the economy is already producing at its full capacity, any increase in aggregate demand will only lead to a rise in the price level, without affecting output. This implies that the economy is operating on the vertical portion of the aggregate supply curve, where any increase in aggregate demand will only increase the price level, but not output. Therefore, the best answer is C, as an increase in government spending leads to an increase in the price level, without affecting output, indicating that the economy is at its full capacity.

The Federal Government Increases Spending by $50 Billion and the Main