Question

Based on recent data of realgdp in chained dollars as well as percent change in price for real gdp given by the bea, what component of AD changed the most? How does increase in government spending affect aggregate demand in a recession? Why?

Answer 1

The component of the aggregate demand which has changed the most is government expenditure. There has many constant changes in the level of government spending and thus Government expenditure has changed the most in the recent years. During the time of recession, when overall aggregate demand in the economy is falling, then an increase in government spending can help in increasing the level of aggregate demand in the economy and prevent fall in income level and overall economic growth rate in the economy. Thus, it is seen that during the times of recession, the government follows expansionary fiscal policy to increase national output in the economy.