Question

In the intermediate range of the aggregate supply curve, if government spending increases caused the aggregate...

In the intermediate range of the aggregate supply curve, if government spending increases caused the aggregate demand curve to shift outwards, which of the following is most likely to occur?

a.

The price level and real GDP will both rise.
b.

Both the price level and real GDP will not change.
c.

The price level will rise, but real GDP will not change.
d.

The price level will not change, but real GDP will increase.
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Answer #1

(A). The price level and real GDP will both rise.

In the intermediate range of the aggregate supply curve, if government spending increases caused the aggregate demand curve to shift outwards, the price level and real GDP will both rise. The aggregate demand curve, or AD curve, shifts to the right as the components of aggregate demand—consumption spending, investment spending, government spending, and spending on exports minus imports—rise. The AD curve will shift back to the left as these components fall.

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