Refer to the Graph Below

question 40

Multiple Choice

Refer to the graph below.The economy is initially at equilibrium when AD₁ and AS₁ intersect.If there is cost-push inflation in the economy so that aggregate supply shifts from AS₁ to AS₂,then to reduce unemployment the government may increase aggregate demand which in the short run shifts:

• A) AD₁ to AD₂,increases the price level from P₁ to P₂,and increases real domestic output from Q₁ to Q₂.
• B) AD₁ to AD₂,increases the price level from P₂ to P₃,and increases real domestic output from Q₁ to Q₂.
• C) AD₁ to AD₂,increases the price level from P₂ to P₃,and increases real domestic output from Q₂ to Q₁.
• D) AD₂ to AD₁,decreases the price level from P₃ to P₂,and decreases real domestic output from Q₁ to Q₂.