Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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![**Question**:
2. Draw an AD-AS graph at equilibrium. Suppose there is an increase in government spending. Which curve will shift? Draw the new equilibrium.
**Guidance for Educational Website**:
To illustrate the effects of an increase in government spending on an economy, follow these steps on the AD-AS graph:
1. **Initial Equilibrium**: Begin with the AD-AS model. The axes represent price level (vertical axis) and real GDP/output (horizontal axis). At equilibrium, the Aggregate Demand (AD) curve intersects the Aggregate Supply (AS) curve.
2. **Impact of Increased Government Spending**: An increase in government spending will shift the AD curve to the right. This is because government spending is a component of aggregate demand.
3. **New Equilibrium**: The rightward shift of the AD curve leads to a new intersection point with the AS curve, representing a higher output and price level in the economy.
**Graph Explanation**:
- **Initial Equilibrium**: Point where AD and AS intersect.
- **Shift**: AD curve shifts right due to increased government spending.
- **New Equilibrium**: New intersection of AD and AS, indicating increased output and higher price level.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F11c3e735-47a2-4be2-bcf0-76944b0744ea%2F353a699f-a9d6-4104-9299-9440060326ca%2F3o8zr1_processed.png&w=3840&q=75)
Transcribed Image Text:**Question**:
2. Draw an AD-AS graph at equilibrium. Suppose there is an increase in government spending. Which curve will shift? Draw the new equilibrium.
**Guidance for Educational Website**:
To illustrate the effects of an increase in government spending on an economy, follow these steps on the AD-AS graph:
1. **Initial Equilibrium**: Begin with the AD-AS model. The axes represent price level (vertical axis) and real GDP/output (horizontal axis). At equilibrium, the Aggregate Demand (AD) curve intersects the Aggregate Supply (AS) curve.
2. **Impact of Increased Government Spending**: An increase in government spending will shift the AD curve to the right. This is because government spending is a component of aggregate demand.
3. **New Equilibrium**: The rightward shift of the AD curve leads to a new intersection point with the AS curve, representing a higher output and price level in the economy.
**Graph Explanation**:
- **Initial Equilibrium**: Point where AD and AS intersect.
- **Shift**: AD curve shifts right due to increased government spending.
- **New Equilibrium**: New intersection of AD and AS, indicating increased output and higher price level.
![**Instructions**
You will draw four separate Aggregate-Demand/Aggregate-Supply graphs. Each graph will have one curve shift. Be sure to label axes, curves, and equilibrium. Change colors to show the shift and label the new equilibrium.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F11c3e735-47a2-4be2-bcf0-76944b0744ea%2F353a699f-a9d6-4104-9299-9440060326ca%2Fnhmuvg_processed.png&w=3840&q=75)
Transcribed Image Text:**Instructions**
You will draw four separate Aggregate-Demand/Aggregate-Supply graphs. Each graph will have one curve shift. Be sure to label axes, curves, and equilibrium. Change colors to show the shift and label the new equilibrium.
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