In the short run, an increase in government purchases

shifts the aggregate demand curve to the left.
decreases the price level.
shifts the aggregate supply curve to the right.
increases real GDP.

Solutions

Expert Solution

Answer – The components of the Aggregate demand (AD) are:

(i) Consumption (C)

(ii) Investment (I)

(iii) Government expenditure (G)

(iv) Net exports (NX)

So, when G ↑es, AD ↑es and the AD curve shifts to the right.

The Aggregate Supply (AS) curve remains unchanged.

As a result, real GDP and price level both increases.

So, only Option D is the right answer.

Rahul Sunny answered 1 year ago

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