Answered: Explain how an increase in government…

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter8: Aggregate Demand And Aggregate Supply

Section: Chapter Questions

Problem 11QP

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Question

Explain how an increase in government expenditure can affect the goods market and money
market by taking the link between the two markets into account.

Definition Definition Financial market that deals in securities or assets that are short-term in nature. The money market is responsible for keeping up the liquidity of the businesses and the organizations. These securities are usually held for a period of 12 months or less and are issued by institutions that require cash or funds for their short-term cash flow requirements. The money market is regulated by the federal government.

Expert Solution

Step 1

Government spending refers to the expenditures of the government including consumption, investment, and transfer payments.

Step 2

An increase in government expenditure leads to a rightward shift in the aggregate demand curve to the right. A rightward shift in the aggregate demand curve will lead to an increase in consumer spending resulting in increase in price level and so the equilibrium GDP.

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