Question

Suppose that the administration in charge of the government proposes closing military bases to reduce defense spending.

Aggregate demand (AD) components include consumption (C), investment (I), government purchases (G), and net exports (NX). Analyze what the aggregate demand and aggregate supply model would predict here (assuming everything else remains the same) to answer the following questions:

1. Which component of AD is primarily affected

a. Government purchases (G)

b. Net exports (NX)

c. Consumption (C)

d. Investment (I)

2. What likely happens to the AD curve?

a. AD shifts to the left (it decreases)

b. AD shifts to the right (it increases)

c. AD stays in the same location

3. What likely happens to the level of unemployment?

a. Unemployment increases

b. Unemployment remains the same

c. Unemployment decreases

Answer 1

a. Government purchases (G)

a. AD shifts to the left (it decreases)

a. Unemployment increases

Step-by-step explanation:

The military bases are part of the government Hence reducing them is reducing the government spending component of the aggregate demand.

As the government spending decrease and nothing changes the aggregate demand will shift to the left which represent a decrease

As the military bases are closed unemployment will increase as some of the employees will find frictional unemployment until convert into another area of the economy