Question

If the U.S. government increases its expenditures (without any change in taxes) and at the same time the Federal Reserve Bank increases the money supply, the AD curve would:

Answer 1

Shift to the right

Step-by-step explanation:

The AD curve will shift to the right because the increase in government expenditure will boost aggregate demand. For example, if the government spends more on infraestructure, more people will be hired in the construction industry, and they will receive wages that will be spent on goods and services.

Besides, in this case the Fed will have increased the money supply as well. An increase in the money supply leads to more employment because there are more funds available to invest and spend. As companies invest more, they hire more people.