explain how the government can cause consumption, government spending, investment, and exports to increase and thus...

explain how the government can cause consumption, government spending, investment, and exports to increase and thus stimulate GDP and improve the economy.

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Expert Solution

Increased government spending is likely to cause a rise in aggregate demand (AD). This can lead to higher growth in the short-term. It can also potentially lead to inflation.

Higher government spending will also have an impact on the supply-side of the economy – depending on which area of government spending is increased. If spending is focused on improving infrastructure, this could lead to increased productivity and a growth in the long-run aggregate supply. If spending is focused on welfare benefits or pensions, it may reduce inequality, but it could crowd out more productive private sector investment.

Rahul Sunny answered 1 year ago

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