Question

In: Economics

In the short run, an increase in government purchases, a. shifts the aggregate supply curve to...

In the short run, an increase in government purchases,

a. shifts the aggregate supply curve to the right

b. increases real GDP

c. shifts the aggregate demand curve to the left

d. decreases the price level

Solutions

Expert Solution

The correct answer is (b) increases real GDP

As Government spending is a Aggregate demand side phenomenon and hence will effect Aggregate Demand(AD) curve and not Aggregate supply curve(AS) and hence option (a) is incorrect.

Increase in Government spending will shift IS curve to the right and hence will result in AD curve to shift to the right. As AS curve will remain same and AD shift to the right, both Real GDP and Price level both will increase.

Hence, the correct answer is (b) increases real GDP.

Rahul Sunny answered 2 years ago
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