Question

An increase in government purchases of $100 billion will shift the aggregate-demand curve to the:

A. right by more or less than $100 billion

B. left by more or less than $100 billion

C. left by more than $100 billion

D. right by more than $100 billion

Answer 1

The government purchases is a component of the aggregate demand.

An increase in the government purchases will lead to an increase in aggregate demand. When aggregate demand increases, the aggregate demand curve shifts to the right.

However, an initial increase in government purchase creates a multiplier effect in the economy. This leads to far greater increase in the aggregate demand than the initial increase in government purchases.

The government purchases has increased by $100 billion. This will increase the aggregate demand. However, due to multiplier effect, the increase in aggregate demand would be greater than the $100 billion.

Thus,

The correct answer is the option (D) [right by more than $100 billion].