Refer to the graph below. The economy is initially at equilibrium when AD₁ and AS₁ intersect. If there is cost-push inflation in the economy so that aggregate supply shifts from AS₁ to AS₂, then to reduce unemployment the government may increase aggregate demand which in the short run shifts: A) AD₁ to AD₂, increases the price level from P₁ to P₂, and increases real domestic output from Q₁ to Q₂. B) AD₁ to AD₂, increases the price level from P₂ to P₃, and increases real domestic output from Q₁ to Q₂. C) AD₁ to AD₂, increases the price level from P₂ to P₃, and increases real domestic output from Q₂ to Q₁. D) AD₂ to AD₁, decreases the price level from P₃ to P₂, and decreases real domestic output from Q₁ to Q₂.

Question

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The Answer of Refer to the graph below. The economy is initially at equilibrium when AD₁ and AS₁ intersect. If there is cost-push inflation in the economy so that aggregate supply shifts from AS₁ to AS₂, then to reduce unemployment the government may increase aggregate demand which in the short run shifts: A) AD₁ to AD₂, increases the price level from P₁ to P₂, and increases real domestic output from Q₁ to Q₂. B) AD₁ to AD₂, increases the price level from P₂ to P₃, and increases real domestic output from Q₁ to Q₂. C) AD₁ to AD₂, increases the price level from P₂ to P₃, and increases real domestic output from Q₂ to Q₁. D) AD₂ to AD₁, decreases the price level from P₃ to P₂, and decreases real domestic output from Q₁ to Q₂.

Refer to the Graph Below