Free-Response Answers and Explanations
- A.There are two ways to handle this solution. If you drew either of the following graphs, then you are correct.
B.There are also two ways to handle this solution:
■ A decrease in government spending will have an impact on a rising price level. A decrease in government
expenditures will slow private sector growth.
■ An increase in personal taxes will help stabilize the price level by decreasing disposable income.
Real GDP
Full employment
LRAS SRAS
Price
Level
Real GDP
AD
AS
AD^1
Price
Level
Part IV: AP Macroeconomics & Microeconomics Tests