Expansionary Fiscal Policy
The question
Assume the economy of Alta is initially in long-run equilibrium. In response to political pressure, the government of Alta significantly increases its purchases of goods and services, financed by borrowing. Show the short-run effect of this policy on Alta's economy, assuming the central bank takes no action. Show the effect on the AD-AS Model graph.
Drag a curve, or use the arrow buttons. Want the free-play version with every control? Open this graph in the sandbox.
Expansionary Fiscal Policy: the worked answer
On the AD-AS Model graph, AD shifts right.
Why AD shifts right
Government purchases are a component of aggregate demand. When the government of Alta buys more goods and services, total spending in the economy rises at every price level, shifting aggregate demand to the right. Firms' production costs and the economy's productive capacity are unchanged, so neither the short-run nor the long-run aggregate supply curve shifts.
What happens to the equilibrium
The equilibrium price level rises and real GDP increases above full-employment output in the short run.
The mistake students make on this one
Many students also shift LRAS right, reasoning that government spending on roads and buildings adds to the nation's capacity. LRAS moves only when the quantity of resources or the level of technology changes, and a one-year increase in purchases changes neither, so the extra output here is a temporary gap above potential rather than a higher potential.
On exam day
If the stimulus is a change in C, I, G, or Xn, move AD alone and then read the new price level and output off the AD-SRAS intersection, not off LRAS.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when AD shifts right and every other curve on the AD-AS Model graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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