Question

In the short run, if the government attempts to increase aggregate demand, it should...

a: increase government spending and reduce taxes

b: decrease government spending and increase taxes

c: shift the long-run aggregate supply curve to the right

d: shift the short-run aggregate supply curve to the right

Answer 1

Answer: a: increase government spending and reduce taxes

Step-by-step explanation:

Aggregate Demand is a measure of just how much goods people in the economy demanded in a certain period.

That means it can be calculated as where,

AD = C + I + G + ( X - M )

Where,

C is Consumption

I is Investment

G is Government Spending

(X - M) is net exports.

If the Government increases it's spending, you can see that from the formula, AD will rise as well because Government Spending is one of it's components.

Reducing Taxes also imparts this Formula because less taxes equates to more disposable income which equates to more Consumption. A higher consumption as you can see, leads to a higher Aggregate Demand.

Answer 2

increase government spending and reduce taxes

Step-by-step explanation:

Aggregate demand is defined as the total demand for goods and services within an economy.

When a government wants to increase aggregate demand for goods and services it will need to provide available funds to the public to stimulate spending.

Increase in government spending and reduction in taxes makes more money available to people to spend in the economy.

The more money they have, the more products they will buy. Increasing demand.