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Figure: Fiscal Policy II
-(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E₁. If there is a decrease in government transfers, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

Question

Use the following to answer questions:
Figure: Fiscal Policy II

-(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E₁. If there is a decrease in government transfers, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

Quizplus · Accepted Answer

A decrease in government transfers would lead to a lower disposable income for consumers, reducing consumption spending. This would cause a leftward shift in the aggregate demand curve (ADS1U1B11) to ADS1U1B12, resulting in a decrease in both the price level and real GDP. Option D accurately describes these changes.

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