Suppose that the federal administration plans to fight a deep ongoing recession

Question

Suppose that the federal administration plans to fight a deep ongoing recession with a nationwide plan of increasing infrastructure. Congress approves it and adjusts the budget accordingly to put the plan in motion immediately. Aggregate demand spending components include consumption (C), investment (I), government (G), and exports (X) minus imports (M). Analyze what the aggregate demand and aggregate supply model predicts about the infrastructure plan to answer the following three questions. What happens to the level of G (it can increase (+), decrease (-) or stay constant (0)). What likely happens to the aggregate demand curve? What likely happens to the level of unemployment?

Explanation / Answer

Answer 1:

Level of government spending will increase.Option A.

Answer 2:

It wil shift to the right. Option B.

Answer 3:

Unemployment will decrease. Option A. This is because as AD increases firms will employ more workers to produce more output. Thus, unemployment will decrease.

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