FIGURE 24-1 -Refer to Figure 24-1.If the economy is currently producing output of Y₀ and the government initiates an expansionary fiscal policy adequate to close the output gap,the result is intended to be A)the vertical line at Y^* will shift to the left,intersecting the AS and AD curves at Y₀. B)no change in either price level or output,since expansionary fiscal policy is ineffective. C)that the AS curve will shift to the right until point A is reached. D)that the AS curve and the AD curve will shift left simultaneously. E)that the AD curve will shift to the right until point B is reached.

Question

Quizplus · Accepted Answer

An expansionary fiscal policy is intended to increase aggregate demand (AD) and shift the AD curve to the right. This will result in an increase in output and potentially an increase in price level. In the diagram, this will shift the AD curve until it intersects with the AS curve at point B, resulting in a new equilibrium output level of YS1U1B20S1U1B0 at a higher price level of P1.

FIGURE 24-1 -Refer to Figure 24-1.If the Economy Is Currently Producing Output