On the following graph, AD₁ represents the initial aggregate demand curve in a hypothetical economy, and SRAS represents the initial aggregate supply curve. The economy's natural real GDP is $12 trillion. PRICE LEVEL 106 104 102 100 98 96 6 8 NRGDP AD₁ 10 12 REAL GDP (Trillions of dollars) 14 SRAS AD 3 16 AD2
On the following graph, AD₁ represents the initial aggregate demand curve in a hypothetical economy, and SRAS represents the initial aggregate supply curve. The economy's natural real GDP is $12 trillion. PRICE LEVEL 106 104 102 100 98 96 6 8 NRGDP AD₁ 10 12 REAL GDP (Trillions of dollars) 14 SRAS AD 3 16 AD2
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:The initial short-run equilibrium level of real GDP is $10 trillion
Suppose the government, seeking full employment, borrows money and increases its expenditures by the amount it believes necessary to close the
output gap. According to critics of Keynesian fiscal policy, which curve in the previous graph will most likely be the new aggregate demand curve?
O AD1
AD2
O AD3
As a result, the equilibrium level of real GDP will be
and the initial short-run equilibrium price level is 100
, and the equilibrium price level will be
According to critics of Keynesian fiscal policy, which of the following is true in this case?
This is an example of
Real GDP does not increase; only the price level increases.
The increase in deficit-financed government spending has no impact on real GDP and the price level.
The increase in deficit-financed government spending causes real GDP to increase, but not to natural real GDP.
O The increase in deficit-financed government spending causes real GDP to increase to natural real GDP.
Transcribed Image Text:On the following graph, AD₁ represents the initial aggregate demand curve in a hypothetical economy, and SRAS represents the initial aggregate
supply curve. The economy's natural real GDP is $12 trillion.
PRICE LEVEL
106
104
102
100
98
96
6
8
NRGDP
AD₁
10
12
REAL GDP (Trillions of dollars)
14
SRAS
AD 3
16
AD2
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