Suppose investment levels are alarmingly low. Using the AS/AD model, explain whether government should increase or...

Suppose investment levels are alarmingly low. Using the AS/AD model, explain whether government should increase or decrease its expenditure.

Expert Solution

If the investment is low then the demand in the market will be low as investment in the market is part of the aggregate demand, if the AD is low then the market will be at a recessioanry gap and the government will need to increase the expenditure and lower taxes, this will increase the aggregate demand in the market and bring the economy at the potential output.

the government will have to increase the expenditure.

Rahul Sunny answered 2 years ago

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