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Question 1 of 7

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Consider the following graph. The aggregate demand (AD) curve, short-run aggregate supply (SRAS) curve, and long-run aggregate supply (LRAS) curve are given in this graph.

The horizontal axis is labeled Aggregate Output, and the vertical axis is labeled Aggregate Price Level. The graph shows the short-run aggregate supply curve, an upward sloping line labeled SRAS. The aggregate demand curve, labeled AD, is a downward sloping line that intersects the SRAS curve approximately in the center.  The long-run aggregate supply curve, labeled LRAS, is a vertical line that runs through the intersection of the SRAS and AD curves.

Here, aggregate output is its full-employment level.

As the point of intersection between the SRAS and the AD curve lies on the LRAS curve, short-run aggregate output is equal to the long-run full-employment aggregate output.
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If the government decides to raise its level of spending, this is considered a(n) .

Government spending is fiscal policy, and increased spending expands GDP.
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When government increases expenditures, aggregate demand will .

Expansionary policy moves AD to the right.
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As a result of increased government expenditures, aggregate price level will and aggregate output will .

The new intersection point of SRAS and AD corresponds to increases in both aggregate price level and aggregate output.
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The horizontal axis is labeled Aggregate Output, and the vertical axis is labeled Aggregate Price Level. The graph shows the short-run aggregate supply curve, an upward sloping line labeled SRAS. The aggregate demand curve, labeled AD, is a downward sloping line that intersects the SRAS curve approximately in the center.  The long-run aggregate supply curve, labeled LRAS, is a vertical line that runs through the intersection of the SRAS and AD curves.

Because the government stimulus pushes up prices, short-run aggregate supply will in the long run.

Higher prices mean higher input costs. This reduces aggregate supply and pushes it left.
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As a result of the SRAS curve shifting left, CPI will and aggregate output will .

A leftward shift of the SRAS curve results in a new equilibrium in which aggregate price level increases and aggregate output level decreases.
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The ultimate result of this increased government spending is that: CPI is the original price level, CPI is the short-run price level immediately following the stimulus, aggregate output is the original output level, and aggregate output is the short-run output level immediately following the stimulus.

The rightward shift in AD and the leftward shift in SRAS both push aggregate price level up, combining to result in a large increase in the price level. The rightward shift in AD increases GDP, but the leftward shift in SRAS lowers it. Since here, the original output level was already the full-employment level, any output increase is temporary.
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