Question

1. If we increase government spending on education and infrastructure how will this impact AD/AS in the

a) Classical Model

b) Keynesian Model

c) Supply-side Model

Answer 1

Government Spending- Education & Infrastructure
Classical Model
The classical model of economics calls for the free government market where the intervention of government is literally denied. The model suggests that the market itself can find the demand and supply with free market policies. Supply creates its own demand. So, the aggregate demand and supply is not at all depended on governmental spending. The aggregate demand and supply curves have the nature of forming equilibrium and AS/AD without the spending or investment from the part of government. So an increase in government spending on education and infrastructure cannot shift or change the aggregate demand or supply curve since the model do not include the concept of governmental intervention.
Keynesian Model
The model calls to an increased demand which could improve the economy. Keynes suggests the idea of more to demand thus expanding the economy through a cyclic process. Keynes also demands the need of governmental intervention to stimulate the demand-supply process. An increased government spending on education and infrastructure in the Keynesian model could increase the demand and thus supply leading to a change in the aggregate supply and demand curve leading to an economic growth.
Supply Side Model
The model suggests the growth of an economy through supply side factors. As, Keynesian model suggests the demand driven economy, supply side suggests the supply driven economy. Economy could grow on the basis of the supply or its level of production. A government spending in education and infrastructure through lowering taxes and regulations could help the economy to supply further and attain better aggregate supply and demand situations.