Infrastructure Investment Shifts AS Rightward

Steps:

• Government infrastructure spending boosts productive capacity by improving transportation and efficiency.
• This causes the short-run aggregate supply (SRAS) curve to shift rightward.
• With AD unchanged, the new equilibrium features higher real output and a lower price level.
• The initial equilibrium at X moves to a point with increased GDP and reduced inflation.

Why B is correct:

• B depicts the rightward SRAS shift, aligning with supply-side policy effects that expand potential output per the AD-AS model.

Why the others are wrong:

• A incorrectly shows an AD shift, which would occur from demand-side stimulus like tax cuts.
• C implies no change or leftward shift, ignoring infrastructure's productivity gains.
• D suggests higher prices with output rise, which contradicts the AS expansion lowering costs.

Final answer: B