Exhibit 17-1 Aggregate demand and supply model

-Beginning at equilibrium E₁ in Exhibit 17-1,when the government increases spending or cuts taxes the economy will experience:
A)an inflationary recession.
B)stagflation.
C)cost-push inflation.
D)demand-pull inflation.
E)steady state.

Question

Exhibit 17-1 Aggregate demand and supply model
 
-Beginning at equilibrium E₁ in Exhibit 17-1,when the government increases spending or cuts taxes the economy will experience:
A)an inflationary recession. 
B)stagflation. 
C)cost-push inflation. 
D)demand-pull inflation. 
E)steady state.

Quizplus · Accepted Answer

When the government increases spending or cuts taxes, it shifts the aggregate demand curve to the right. This leads to an increase in both price level and real GDP, and ultimately results in demand-pull inflation.

Exhibit 17-1 Aggregate Demand and Supply Model