In the AD-AS model, how is the price level affected when spending by the federal government exceeds net taxes?
A) The price level tends to rise.
B) The price level tends to fall.
C) The price level remains the same.
D) The price level tends to first rise, and then fall.

Question

In the AD-AS model, how is the price level affected when spending by the federal government exceeds net taxes?  
A) The price level tends to rise. 
B) The price level tends to fall. 
C) The price level remains the same. 
D) The price level tends to first rise, and then fall.

Quizplus · Accepted Answer

When spending by the federal government exceeds net taxes, there is an increase in aggregate demand, which leads to an increase in the price level in the short run in the AD-AS model. This is because firms initially respond to the increased demand by raising prices to take advantage of the higher level of spending. However, over time, the increase in prices may lead to a decrease in the quantity demanded, and the price level may fall back to its original level in the long run.

In the AD-AS Model, How Is the Price Level Affected