In the AD-AS model, if government purchases increase and net taxes decrease, what will happen to output and employment?
A) Output will rise and employment will fall.
B) Output will fall and employment will rise.
C) Output will rise and employment will rise.
D) Output will fall and employment will fall.

Question

In the AD-AS model, if government purchases increase and net taxes decrease, what will happen to output and employment?  
A) Output will rise and employment will fall. 
B) Output will fall and employment will rise. 
C) Output will rise and employment will rise. 
D) Output will fall and employment will fall.

Quizplus · Accepted Answer

The fiscal policy change described in the question involves an increase in government purchases and a decrease in taxes, which will shift the aggregate demand (AD) curve to the right. This will result in an increase in both output and employment. The increase in government purchases will directly increase aggregate demand, while the decrease in net taxes will increase disposable income and therefore increase consumption, further pushing AD to the right.

In the AD-AS Model, If Government Purchases Increase and Net