ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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not affect aggregate demand.
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decrease aggregate demand.
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increase aggregate demand, but not by as much as if just government spending increases.
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increase aggregate demand by more than if just government spending increases.
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Detailed explanation-1: -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: -If government spending increases, for example, and all other spending components remain constant, then output will increase. Keynesian models of economic activity also include a multiplier effect; that is, output changes by some multiple of the increase or decrease in spending that caused the change.
Detailed explanation-3: -The introduction of positive government expenditure increases the disposable income of the overall economy. Hence, the consumption expenditure and the investment made will increase by the amount of government expenditure, leading to the high equilibrium level of income.
Detailed explanation-4: -Answer and Explanation: The correct answer is (c) of the multiplier effect.