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In: Economics

When federal government increases its government expenditure, (assuming other things equal), how does the aggregate demand change?


When federal government increases its government expenditure, (assuming other things equal), how does the aggregate demand change? 

no change 

aggregate demand increases and AD curve shifts to the right on the AD-AS diagram 

aggregate demand increases and AD curve shifts to the left on the AD-AS diagram 

aggregate demand decreases and AD curve shifts to the left on the AD-AS diagram


When the Fed increases money supply, how does it affect interest rate (r) and aggregate demand (AD)? 

r falls and AD rises 

r falls and AD falls 

r rises and AD rises 

r rises and AD falls

Solutions

Expert Solution

1. Aggregate demand increases and AD curve shifts to the right on the AD-AS diagram

All other things being constant, an increase in government expenditure will shift the aggregate demand curve to the right. Government expenditure is one of the components of aggregate demand. So increase in any of the components will increase the aggregate demand.

1. r falls and AD rises

Increase in money supply wil lower the interest rate. Borrowing becomes easier and investment increases. Due to increase in investment, aggregate demand increases.

Rahul Sunny answered 2 years ago
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