Expansionary Fiscal Policy Increases Aggregate Demand

Steps:

• Government spending on education raises G, shifting AD curve rightward.
• In the short run, this boosts real output toward or beyond potential Y (position PY).
• Higher output reduces unemployment via Okun's law (more jobs created).
• Upward pressure on prices increases inflation.

Why B is correct:

• AD shift right raises output and prices, lowering unemployment and raising inflation per the AD-AS model.

Why the others are wrong:

• A: Inflation rises, not falls, with AD expansion.
• C: Unemployment falls, not rises, from higher output.
• D: Unemployment falls, not rises, despite inflation rise.

Final answer: B