Consider the following news headline: "Governments plan massive hospital construction programs across the country." Choose the statement below that best describes the likely macroeconomic effects.
A)the AD curve shifts to the left; the price level falls and real GDP falls
B)the AD curve shifts to the right; the price level rises and real GDP rises
C)the AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the effect on real GDP is indeterminate
D)the AD curve shifts to the left and the AS curve shifts to the right; the price level falls and the effect on real GDP is indeterminate
E)the AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises

Question

Quizplus · Accepted Answer

The planned massive hospital construction programs will likely increase government spending, which will shift the aggregate demand (AD) curve to the right. As a result, the price level will rise along with real GDP, as more funds are spent on construction projects and healthcare services. The statement does not provide any information to suggest that the aggregate supply (AS) curve will shift, so option C and D are not applicable. Option A is unlikely because hospital construction programs will create jobs and stimulate economic activity, not reduce them. Option E is also not applicable because the effect on the price level is not indeterminate if the AD curve shifts to the right.

Consider the Following News Headline: "Governments Plan Massive Hospital Construction