The diagram shows the AD, AS, and Y* curves for an economy. Suppose the economy begins at point A. Then the government increases its level of purchases (G). a. In the short run, this fiscal expansion will shift the OA. AD curve right, lowering the price level and equilibrium GDP. OB. AD curve right, raising the price level and equilibrium GDP. OC. Y curve right, raising the price level and equilibrium GDP. OD. Y* curve left, lowering the price level and equilibrium GDP. b. In the long run, wages and unit costs OA. rise, shifting the AS curve to the left. OB. fall, shifting the AD curve to the left. OC. rise, shifting the AD curve to the right. OD. fall, shifting the AS curve to the right. c. In going from the initial to the new long-run equilibrium, the composition of real GDP O A. will not change because there is no effect on the current level of potential output in the long run. OB. may change because there could be some crowding out of public investment. OC. will change because there is no effect on the current level of potential output in the long run. OD. may change because there could be some crowding out of private investment. d. If instead of an increase in government purchases there was a reduction in the net tax rate, OA. there would be no effect on the current level of potential output in the long run. OB. there will be less investment and a fall in equilibrium GDP. OC. the price level would fall in the long run. OD. there could be a positive effect on the level and growth rate of potential output. P2 P1 PO Y* Real GDP AS AD₁ ADO
The diagram shows the AD, AS, and Y* curves for an economy. Suppose the economy begins at point A. Then the government increases its level of purchases (G). a. In the short run, this fiscal expansion will shift the OA. AD curve right, lowering the price level and equilibrium GDP. OB. AD curve right, raising the price level and equilibrium GDP. OC. Y curve right, raising the price level and equilibrium GDP. OD. Y* curve left, lowering the price level and equilibrium GDP. b. In the long run, wages and unit costs OA. rise, shifting the AS curve to the left. OB. fall, shifting the AD curve to the left. OC. rise, shifting the AD curve to the right. OD. fall, shifting the AS curve to the right. c. In going from the initial to the new long-run equilibrium, the composition of real GDP O A. will not change because there is no effect on the current level of potential output in the long run. OB. may change because there could be some crowding out of public investment. OC. will change because there is no effect on the current level of potential output in the long run. OD. may change because there could be some crowding out of private investment. d. If instead of an increase in government purchases there was a reduction in the net tax rate, OA. there would be no effect on the current level of potential output in the long run. OB. there will be less investment and a fall in equilibrium GDP. OC. the price level would fall in the long run. OD. there could be a positive effect on the level and growth rate of potential output. P2 P1 PO Y* Real GDP AS AD₁ ADO
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:The diagram shows the AD, AS, and Y* curves for an economy. Suppose the economy begins at point A. Then the government
increases its level of purchases (G).
a. In the short run, this fiscal expansion will shift the
A. AD curve right, lowering the price level and equilibrium GDP.
B. AD curve right, raising the price level and equilibrium GDP.
C. Y* curve right, raising the price level and equilibrium GDP.
D. Y* curve left, lowering the price level and equilibrium GDP.
b. In the long run, wages and unit costs
A. rise, shifting the AS curve to the left.
B. fall, shifting the AD curve to the left.
C. rise, shifting the AD curve to the right.
D. fall, shifting the AS curve to the right.
c. In going from the initial to the new long-run equilibrium, the composition of real GDP
A. will not change because there is no effect on the current level of potential output in the long run.
B. may change because there could be some crowding out of public investment.
C. will change because there is no effect on the current level of potential output in the long run.
D. may change because there could be some crowding out of private investment.
d. If instead of an increase in government purchases there was a reduction in the net tax rate,
A. there would be no effect on the current level of potential output in the long run.
B. there will be less investment and a fall in equilibrium GDP.
C. the price level would fall in the long run.
D. there could be a positive effect on the level and growth rate of potential output.
Price Level
P2
P1
PO
C
A
ув
Y*
Real GDP
AS
AD1
ADO
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Step 1: Define aggregate demand and aggregate supply
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VIEWStep 4: Explain the effect on the change in composition of real GDP
VIEWStep 5: Explain the effect on real GDP and price level due to decrease in the net tax rate
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