Question

a. If worries over its debt levels causes the federal government to decrease its purchases of goods and services then the aggregate demand curve  (does not shift. shift to the left, shift to the right)  does not shift  shifts to the left  shifts to the right  , the equilibrium price level  (increase, decrease, does not change)  increases  decreases  does not change  , and equilibrium real output  (increase, decrease, does not change)  does not change  decreases  increases  .

Answer 1

1) Aggregate demand curve - shifts to the Left

( Government Expenditure is one of the components of aggregate demand. A reduction in government spending reduces aggregate demand and shifts aggregate demand curve to left. )

2) Equlibrium price level - Decreases

3) Equlibrium real output -Decreases

(When aggregate demand curve shifts to left, new equlibrium will be determined by the intersection of initial aggregate supply curve and new aggregate demand curve which lies left to initial aggregate demand curve. Result will be a reduction in price and real output.)

E is the initial equilibrium in the above diagram, P is the equlibrium price and Q is the equlibrium quantity. As government Expenditure falls, aggregate demand falls. Aggregate demand curve shifts to left from AD to AD1. New equlibrium is determined by the intersection of AS and AD1. At the new equlibrium, Price falls from P to P1 and quantity falls from Y to Y1.