Figure 352 Use the pair of diagrams below to answer the foll

Figure 35-2 Use the pair of diagrams below to answer the following questions. Refer to Figure 35-2. If the economy starts at C and 1, then in the short run, an increase in government expenditures moves the economy to O a. B and 2 O b. B and 3. O c. B and 3 O d. None of the above is correct.

Solution

Option A .

The economy will move to point B with an increase in government expenditure as aggregate demand curve shifts rightwards, Along thge Phillips curve economy moves to point 2 with an increased rate of inflation and reduced unemployment rate as output of the economy increases.