Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2 -Refer to Figure 12.2. The output multiplier is smallest when the aggregate demand curve shifts from A) AD₁ to AD₂. B) AD₃ to AD₄. C) AD₅ to AD₆. D) The output multiplier is the same for all AD curve shifts shown in the figure.

Question

Quizplus · Accepted Answer

The output multiplier is smallest when the aggregate demand curve shifts from AD₅ to AD₆. This is because the new equilibrium output (Y2) is closer to the potential output (Yp) than the original equilibrium output (Y1). Therefore, there is less room for expansionary fiscal policy to increase output without causing inflationary pressure, resulting in a smaller output multiplier.

Refer to the Information Provided in Figure 12