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

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Expert Solution

As Aggregate expenditure basically is a sum of consumption , investment , government expenditure and net exports .

So AE = C + I + G + NX

So if the government spending increases , IS curve shift rightwards in ISLM model . Due to rightward shift of IS curve there will be a increase in Aggregate demand , Aggregate demand( AD ) also shift rightwards in AD AS model . But at a same time if money supply is lowered , this will cause leftwards shift of LM curve in ISLM model , due to leftward shift of LM curve , there will be a decrease in aggregate demand ( AD ) , aggregate demand ( AD ) shift leftwards in AD AS model . So first it shift rightwards due to increase in government expenditure and then leftward fue to decrease in monetory policy . At the end AD curve came back to it's initial level . Be sure that AD curve is affected by both shift in IS and LM curve .

Rahul Sunny answered 1 year ago

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