Show the effect of the increase in government spending by shifting the aggregate

Question

Show the effect of the increase in government spending by shifting the aggregate expenditure line.

Show the effect of the increase in government spending by shifting the curve, moving the point, or both.

2. Aggregate demand shifts Consider an increase in government spending. The following graph shows the aggregate expenditure line (AE) and a 45-degree line for the economy. Show the effect of the increase in government spending by shifting the aggregate expenditure line. Tool tip: Click and drag one or both of the curves. Curves will snap into position, so if you try to move the curve and it snaps back to its original position, just try again and drag it a little farther REAL AGGREGATE EXPENDITURE 45-Degree Line AE REAL GDP

Explanation / Answer

Initially goods market is equilibrium and an increase in government expenditure causes to increase in AE due to this AE curve shifts upward and hence output will go up

The increase in output leads to increase in AD as a result AD curve will shift towards right

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