ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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AD will shift right and an inflationary gap will result
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AD will shift left and a recessionary gap will result
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AS will shift right and an inflationary gap will result
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AS will shift left and a recessionary gap will result
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No change will result
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Detailed explanation-1: -CROWDING OUT PRIVATE SPENDING AND EMPIRICAL EVIDENCE Taxes finance government spending; therefore, an increase in government spending increases the tax burden on citizens-either now or in the future-which leads to a reduction in private spending and investment. This effect is known as “crowding out."
Detailed explanation-2: -The aggregate demand curve shifts to the right as the components of aggregate demand-consumption spending, investment spending, government spending, and spending on exports minus imports-rise. The AD curve will shift back to the left as these components fall.
Detailed explanation-3: -An increase in government spending causes the AD curve to shift to the right, whereas a decrease in government spending causes the AD curve to shift to the left. Again, any factor that affects government spending will also impact the AD curve.
Detailed explanation-4: -If an economy is said to be in long-run equilibrium, then Real GDP is at its potential output, the actual unemployment rate will equal the natural rate of unemployment (about 6%), and the actual price level will equal the anticipated price level.