Figure 35-2
Use the pair of diagrams below to answer the following questions.
-Refer to Figure 35-2.If the economy starts at C and 1,then in the short run,a decrease in government expenditures moves the economy to
A)D and 2
B)D and 3.
C)E and 3.
D)None of the above is correct.

Question

Figure 35-2
Use the pair of diagrams below to answer the following questions. 
-Refer to Figure 35-2.If the economy starts at C and 1,then in the short run,a decrease in government expenditures moves the economy to
A)D and 2 
B)D and 3. 
C)E and 3. 
D)None of the above is correct.

Quizplus · Accepted Answer

According to the diagram, a decrease in government expenditures would shift the Aggregate Demand (AD) curve leftward from AD1 to AD2, leading to a short-run equilibrium at point D along the new Aggregate Supply (AS) curve. This point has a lower level of output (Y2) and a lower price level (P2), which is consistent with a contractionary fiscal policy. The correct answer is therefore B) D and 3.

Figure 35-2 Use the Pair of Diagrams Below to Answer the Following