Question

The government spends trillions of dollars to stimulate the economy and at the same time, they significantly raise the minimum wage. What would happen to the price level and real GDP as a result?

Answer 1

Aggregate Demand = Consumption + Investment + Government Spending + Exports - Imports

Rise in government spending will directly raise aggregate demand in the economy. A rise in minimum wage will give more money in the hands of public which will raise overall spending and consumption.

Both of these factors will raise aggregate demand in the economy. Rise in aggregate demand will raise price level from P to P1 and output level from Y to Y1.

answered by: anonymous