Question

1. a) Suppose the economy is at an equilibrium on the LRAS curve and the government increases spending. In the short run one would expect a. output and prices to increase b. output to remain constant and prices to increase c. output to increase and prices to remain constant d. output and prices to remain constant 1. b) Suppose the economy is experiencing a inflationary gap and the government increases spending to close the gap. In the short run one would expect    a. output and the price level to remain constant b. output to remain constant and price level to rise c. output and the prive level to rise even further d. output to increase and the price level to remain constant

Answer 1

1 a)Suppose the economy is at an equilibrium on the LRAS curve and the government increases spending. In the short run one would expect output to increase and prices to remain constant because in the short run the supply curve is horizontal and an increase in the govt. spending shifts aggregate demand curve to the right.

b) Suppose the economy is experiencing a inflationary gap and the government increases spending to close the gap. In the short run one would expect output to remain constant and price level to rise  because an increase in spending will further add to the the inflationary pressure with no change in output.