Refer to the Graph Below

question 59

Multiple Choice

Refer to the graph below. Assume that the economy is in initial equilibrium where AS₁ intersects AD₁. Then a supply shock occurs that shifts AS₁ to AS₂. If the government counters with an expansionary fiscal policy that shifts AD₁ to AD₂, then it is most likely that:

• A) AD₂ will shift to AD₁.
• B) AS₂ will shift to AS₁.
• C) AS₂ will shift to AS₃.
• D) AS₂ will shift to AS₃ and AD₂ will shift to AD₁.

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Definitions:

Price Ceiling

A legally imposed limit on how high a price can be charged for a product, service, or commodity.

Equilibrium

A state in which market supply and demand balance each other, and as a result, prices become stable.

Quantity Demanded

The total amount of a good or service that consumers are willing to buy at a given price over a specified period.

Marginal Tax Rates

The rate at which an additional dollar of income is taxed, showing the percentage of tax applied to your income for each tax bracket you pass through.