Increased government spending will, in the short run, _____ aggregate output and _____ the aggregate price level.Choose one answer from the options below.increase; increaseincrease; decreasedecrease; decreasedecrease; increase
Question
Increased government spending will, in the short run, _____ aggregate output and _____ the aggregate price level.Choose one answer from the options below.increase; increaseincrease; decreasedecrease; decreasedecrease; increase
Solution
The correct answer is "increase; increase".
Here's why:
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When the government increases its spending, it is essentially injecting more money into the economy. This leads to an increase in demand for goods and services because the government is now a buyer in the market.
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As demand for goods and services increases, businesses will respond by increasing their production to meet this new demand. This leads to an increase in aggregate output.
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However, when demand increases and businesses are producing at their full capacity, they will start to increase prices to balance the demand and supply. This leads to an increase in the aggregate price level.
So, increased government spending will, in the short run, increase aggregate output and increase the aggregate price level.
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