ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -First, if the government increases its purchases but keeps taxes constant, it increases demand directly. Second, if the government cuts taxes or increases transfer payments, households’ disposable income rises, and they will spend more on consumption. This rise in consumption will in turn raise aggregate demand.

Detailed explanation-2: -What happens to aggregate demand when government spending and the taxes to pay for it both rise by the same amount? a.) Aggregate demand falls by the amount of the government spending.

Detailed explanation-3: -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-4: -Monetary policy attempts to increase aggregate demand during recession by increasing the growth of the money supply. The theory of liquidity preference suggests that increasing the money supply will cause interest rates to fall. Lower interest rates cause higher investment spending which increases aggregate demand.