### Graph ExplanationThe diagram represents an economic model with the following components:- **Y-Axis:** Price level (GDP deflator, 2009 = 100)- **X-Axis:** Real GDP (trillions of 2009 dollars)### Key Curves and Points- **LAS (Long-Run Aggregate Supply):** Vertical line indicating the potential output of the economy at full employment.- **SAS (Short-Run Aggregate Supply):** Upward sloping line showing the relationship between the price level and the quantity of goods and services that firms are willing to produce in the short run.- **AD₀ and AD₁ (Aggregate Demand):** Downward sloping lines. AD₀ is the initial aggregate demand, and AD₁ represents a rightward shift due to increased government expenditure.- **Points:** - **A:** Intersection of LAS, SAS, and AD₀. - **B:** Intersection of LAS and AD₁. - **C:** Intersection of SAS and AD₁.### Question and Options19) In the above figure, if the economy initially is at point A and government expenditure increases, in the short run the economy will move to pointA) B. B) C. C) A, that is, the equilibrium will not change. D) None of the above answers is correct.

Answered: LAS 130 SAS 120 110 B. 100 A. 90 AD1…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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### Graph Explanation

The diagram represents an economic model with the following components:

- **Y-Axis:** Price level (GDP deflator, 2009 = 100)
- **X-Axis:** Real GDP (trillions of 2009 dollars)

### Key Curves and Points

- **LAS (Long-Run Aggregate Supply):** Vertical line indicating the potential output of the economy at full employment.

- **SAS (Short-Run Aggregate Supply):** Upward sloping line showing the relationship between the price level and the quantity of goods and services that firms are willing to produce in the short run.

- **AD₀ and AD₁ (Aggregate Demand):** Downward sloping lines. AD₀ is the initial aggregate demand, and AD₁ represents a rightward shift due to increased government expenditure.

- **Points:**
- **A:** Intersection of LAS, SAS, and AD₀.
- **B:** Intersection of LAS and AD₁.
- **C:** Intersection of SAS and AD₁.

### Question and Options

19) In the above figure, if the economy initially is at point A and government expenditure increases, in the short run the economy will move to point

A) B.
B) C.
C) A, that is, the equilibrium will not change.
D) None of the above answers is correct.

Expert Solution

Step 1

Aggregate demand is the measurements to the total demand by all the individuals of the economy of the finished goods produced in the economy within a particular span of time. The aggregate demand curve is a downward sloping curve depicting the negative relationship between price level and the real GDP. The components of aggregate demand include:

Consumption spending is the total spending by the individuals and households on consumption of goods
Investments spending is the total investments made by firms
Government spending is the total expenditure made by the government
Net exports is the value of all the imports minus all the exports made by the economy

Thus, the formula for aggregate demand is:

$A D = C + I + G + (X - M)$

Where,

AD is the aggregate demand, C is the total consumption spending, I is the total investment spending, G is the total government spending and (X-M) is the net exports.

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