Refer to the information provided in Figure 19.1 below to answer the questions that follow. Figure 19.1
-Refer to Figure 19.1. If the economy is open and the government increases spending by 25, the new equilibrium output is

Question

Refer to the information provided in Figure 19.1 below to answer the questions that follow.  Figure 19.1
-Refer to Figure 19.1. If the economy is open and the government increases spending by 25, the new equilibrium output is

Quizplus · Accepted Answer

In an open economy, the equilibrium output is determined by the intersection of the aggregate demand (AD) and aggregate supply (AS) curves.

In the initial equilibrium, the AD curve intersects the AS curve at point A, where output is 100 and the price level is 110.

If the government increases spending, the AD curve shifts to the right, as shown by the shift from AD1 to AD2. The new equilibrium is at point B, where the AD2 curve intersects the AS curve, and output is 118.75 (the intersection is closer to the AS curve than the initial equilibrium). The price level also rises to 120.

Therefore, the answer is B.

Refer to the Information Provided in Figure 19