Question

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

Answer 1

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 .