If aggregate demand intersects aggregate supply in the horizontal range of the aggregate supply curve, then, other things equal, an increase in government spending will:
A)raise real GDP by the amount indicated by the government spending multiplier and leave the price level unchanged.
B)lower real GDP by an amount equal to the increased spending and reduce inflation.
C)raise the price level and leave real GDP unchanged.
D)raise both real GDP and the price level by a multiple of the initial spending increase.
E)have no effect on real GDP or the price level, because all private investment will be crowded out.

Question

Quizplus · Accepted Answer

If aggregate demand intersects aggregate supply in the horizontal range of the aggregate supply curve, it means that the economy is in a state of recession and there is a lot of unemployment. In this case, an increase in government spending will increase aggregate demand, leading to an increase in real GDP by the amount indicated by the government spending multiplier without changing the price level. This is because in the short run, the economy is operating below its full capacity, so an increase in demand will stimulate production and employment without causing inflation.

If Aggregate Demand Intersects Aggregate Supply in the Horizontal Range