ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Increased government spending is likely to cause a rise in aggregate demand (AD). This can lead to higher growth in the short-term. It can also potentially lead to inflation.

Detailed explanation-2: -Aggregate demand increases when the components of aggregate demand–including consumption spending, investment spending, government spending, and spending on exports minus imports–rise.

Detailed explanation-3: -Changes in Government Purchases. All other things unchanged, a change in government purchases shifts the aggregate expenditures curve by an amount equal to the change in government purchases. A $200-billion increase in government purchases, for example, shifts the aggregate expenditures curve upward by $200 billion.

Detailed explanation-4: -When government spending decreases, regardless of tax policy, aggregate demand decrease, thus shifting to the left. The fourth term that will lead to a shift in the aggregate demand curve is NX(e). This term means that net exports, defined as exports less imports, is a function of the real exchange rate.