Question

1- What is the principle of money supply?

2- How does government spending effect domestic consumption?

Answer 1

Answer: Principle of Money supply :

The money supply is the amount of total M1 in an economy. The supply of money is determined by central bank through controlling Monetary policy. Supply of money has been directly controlled by central bank. An increase in money supply resulted inflation in an economy and to depericates currency. Money supply is considered to be vertical. So, according to the condition of an economy, supply of money can be determined by the central bank.

Answer 2: Government spending is related to expansionary fiscal policy as it can be used by the government to increase demand for goods and services which resulted in increasing output and employment where as a decline in government spending resulted in decreasing output and unemployment.

Government spending included all government consumption , investment and transfer payment. Aggregate demand has been shift towards right. As spending encourage greater output and employment which resulted in increase in domestic consumption.