Question

Assume that the government stimulates aggregate demand by increasing its spending. The effect on output and...

Assume that the government stimulates aggregate demand by increasing its spending. The effect on output and employment will be greater if:

The economy has a high marginal propensity to import

The spending is financed by additional taxation

Its trading partners undertake a similar policy

The economy has a low marginal propensity to consume.
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Answer #1

its trading partners undertake a similar policy

When the aggregate demand is stimulated by increasing the spending aspect then there is an impact on the output and employment but then this impact will be greater if the partners in trade also adopt the same policy because this will give more opportunity to increase the employment as the government as well as the partners both have same policy so more chances are there and therefore it will result in increased output.

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