Suppose that goverment spending is raised at the same time that money supply is lowered. What...

Suppose that goverment spending is raised at the same time that money supply is lowered. What will happen to the position of aggregate demand(AD). Explain

Solutions

Expert Solution

Aggregate demand refers to demand for all goods and services produced in the economy during a period of time. It consists of the following elements : household consumption expenditure (C), private investment expenditure (I), Government expenditure (G), net exports (X-M).

Of the government spending is increased and money supply is decreased all together it can create three scenarios.

1. The Increase in government spending is equal to decrease in money supply. Decrease in money supply means that there will be a decrease in consumer spending. If they both are equal then there will be no effect on the AD curve. It will remain as it is.

2. The Increase in government spending is more than the decrease in money supply. In this case, the AD will increase all together as the net effect will be an increase in the AD. So, the AD curve will shift to the right.

3. The Increase in government spending is less than the decrease in money supply. In this case the AD will decrease as the net effect of the situation will lower the AD. So, the AD curve sill shift to the left.

NOTE: I HOPE YOU WILL BE SATISFIED WITH MY ANSWER PLEASE DO PROVIDE RATING. THANK YOU AND HAVE A NICE DAY. :))

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Suppose that goverment spending is raised at the same time that money supply is lowered. What...

Suppose that goverment spending is raised at the same time that money supply is lowered. What will happen to the position of aggregate demand(AD). Explain

Suppose that instead of financing its spending by borrowing money, the government raised taxes to pay...

Suppose that instead of financing its spending by borrowing money, the government raised taxes to pay for the increase in spending. If the size of the recessionary gap is $200,000 and the MPC is .9, by how much would the government need to increase tax to have enough money to close the gap? Hint: you need to calculate the increase in government spending needed first and then keep in mind that the increase in tax decreases consumer spending. The goal...

a) Suppose the money supply increases. If the demand for money curve remains the same, show...

a) Suppose the money supply increases. If the demand for money curve remains the same, show what will happen to prices of goods and the PPM and explain. Use a graph to illustrate. Clearly label your graph. b) Suppose that at the same time the supply of goods increases, and overall, prices have risen. What has happened? Draw a new PPM graph illustrating your point and explain. Clearly label your graph.

4. The Federal Reserve and the money supply Suppose the money supply (as measured by checkable...

4. The Federal Reserve and the money supply Suppose the money supply (as measured by checkable deposits) is currently $300 billion. The required reserve ratio is 25%. Banks hold $75 billion in reserves, so there are no excess reserves. The Federal Reserve ("the Fed") wants to decrease the money supply by $32 billion, to $268 billion. It could do this through open-market operations or by changing the required reserve ratio. Assume for this question that you can use the oversimplified...

1- What is the principle of money supply? 2- How does government spending effect domestic consumption?

Suppose that the money supply increases substantially. Explain what happens throughout the following steps. Suppose that...

Suppose that the money supply increases substantially. Explain what happens throughout the following steps. Suppose that prior to the increase in the money supply, equilibrium GDP was equal to potential GDP. What type of output gap now exists? If potential GDP does not increase, what will happen to equilibrium GDP in the long run? - Based on your answers above, can expanding the money supply drive long-run growth? What is this relationship called?

1. what are the types of money supply? 2. what is the relationship between money supply...

1. what are the types of money supply? 2. what is the relationship between money supply and interest rate ?

1. what are the types of money supply? 2. what is the relationship between money supply...

1. what are the types of money supply? 2. what is the relationship between money supply and interest rate ?

It is possible for both supply and demand to change at the same time in actual...

It is possible for both supply and demand to change at the same time in actual market situations. Suppose both demand and supply increases and the new equilibrium price is greater than E. What has happened? Suppose both supply and demand decrease and price increases. What has happened?

How can GDP be income and spending at the same time? "Each answer must be about...

How can GDP be income and spending at the same time? "Each answer must be about 1 - 2 paragraphs and use economic models/term to explain your answer."

Subjects