Dual Shifts in AD and AS from Fiscal Policy and Productivity Gains

Steps:

• Increased defense spending raises aggregate demand, shifting AD curve rightward.
• Training boosts workforce productivity, shifting short-run and long-run AS curves rightward.
• Rightward AD shift alone raises output and prices; rightward AS shift alone raises output and lowers prices.
• Combined shifts increase output definitively, with price level ambiguous but higher than initial if AD shift dominates.

Why C is correct:

• C shows new equilibrium at higher output and higher price level, consistent with AD shift outweighing AS shift in standard AD-AS model.

Why the others are wrong:

• A: Indicates only AD shift, ignoring AS expansion.
• B: Suggests lower prices, assuming AS shift dominates.
• D: Implies no output change, contradicting both expansions.

Final answer: C