Section: Principles of Macroeconomics

4) Suppose equilibrium output is y₀ and the price level is p₀ for an aggregate demand and a classical aggregate supply curve. An increase in government spending will result in:

1. an increase in the equilibrium level of output and the price level.
2. an increase in the equilibrium level of output and a decrease in the price level.
3. an increase in the price level and no change in equilibrium output.
4. an increase in the equilibrium level of output and no change in the price level.