Figure 13-3
-Refer to Figure 13-3.Suppose the economy is at point A.If government spending increases in the economy,where will the eventual long-run equilibrium be?

Question

Figure 13-3 
-Refer to Figure 13-3.Suppose the economy is at point A.If government spending increases in the economy,where will the eventual long-run equilibrium be?

Quizplus · Accepted Answer

If government spending increases, the aggregate demand curve shifts to the right. In the short run, equilibrium moves to point B with a higher price level and output. However, as the higher price level leads to an increase in input prices, the SRAS curve shifts up, and the economy moves along the AD curve to point C, where the economy operates at its long-run equilibrium with full employment output and the original price level. Therefore, the eventual long-run equilibrium will be at point C.

Figure 13-3 -Refer to Figure 13-3.Suppose the Economy Is at Point A.If