Refer to the information provided in Figure 12.6 below to answer the questions that follow.
Figure 12.6
-Refer to Figure 12.6.Suppose the equilibrium output is initially $600 billion.A decrease in wages and an increase in government spending will,for sure,increase
A)both the equilibrium output and the price level.
B)the price level.
C)equilibrium output.
D)equilibrium output and decrease the price level.

Question

Refer to the information provided in Figure 12.6 below to answer the questions that follow.
  Figure 12.6
-Refer to Figure 12.6.Suppose the equilibrium output is initially $600 billion.A decrease in wages and an increase in government spending will,for sure,increase
A)both the equilibrium output and the price level. 
B)the price level. 
C)equilibrium output. 
D)equilibrium output and decrease the price level.

Quizplus · Accepted Answer

A decrease in wages will lower production costs, shifting the aggregate supply (AS) curve to the right. An increase in government spending will increase aggregate demand (AD), shifting the AD curve to the right. The intersection of the new AD and AS curves will result in a higher equilibrium output. However, the effect on the price level is ambiguous, as it depends on the relative magnitudes of the shifts in AD and AS. Therefore, we can only be certain that the equilibrium output will increase, making choice C the correct answer.

Refer to the Information Provided in Figure 12