Based on the figure below. Starting from long-run equilibrium at point C, an increase in government spending that increases aggregate demand from AD to AD¹will lead to a short-run equilibrium at point ___ creating _____gap. A) D; an expansionary B) B; expansionary C) A; a recessionary D) B; no output

Question

Quizplus · Accepted Answer

An increase in government purchases is an example of an exogenous increase in spending, which shifts aggregate demand right. A new short-run equilibrium will exist at point D where the economy is experiencing an expansionary gap.

Based on the Figure Below