Aggregate Demand and Supply Analysis

Multiple Choice

Aggregate Demand and Supply Analysis

-In the figure above, assume that output is $10.5 trillion, while potential output is $12 trillion. Suppose that a combination of fiscal stimulus and recovery of consumer and business confidence shifts the IS and AD curves, as shown in the figure, while monetary policy sets the real interest rate at one percent. If the short-run aggregate supply curve is π = Y - 13, then the resulting values of output and inflation are ________.

A) $12 trillion & 3 percent
B) $13.5 trillion & 5 percent
C) $9.75 trillion & 0 percent
D) $13.5 trillion & 0 percent
E) $12.5 trillion & 2 percent