Assume that a consumer can spend 20 on two goodspens and pencils. ...

[s.tung]

Assume that a consumer can spend 20 on two goodspens and pencils. If the price of one pen is 5 and the price of one pencil is 2, which of the following combinations of the two goods represents a point on the consumers budget constraint?
 
  A) 3 pens and 2 pencils
  B) 1 pen and 10 pencils
  C) 2 pens and 5 pencils
  D) 2 pens and 3 pencils

Question 2

Explain how an increase in government expenditure designed to increase aggregate demand can increase potential GDP and aggregate supply.
 
  What will be an ideal response?

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Answer to Question 1

C

Answer to Question 2

Some types of government expenditure provide goods and services that increase the nation's production possibilities. For instance, additional government spending on law and order, public education, public health, social infrastructure such as roads and bridges, and productive capital all increase the economy's production possibilities. So an increase in government expenditure that provides these goods and services all increase potential GDP and increase aggregate supply.