Increases in government spending are NOT very effective in offsetting real shocks because increases in government spending shift the:
A) AD.
B) SRAS.
C) LRAS.
D) demand for loanable funds.

Question

Quizplus · Accepted Answer

Increases in government spending directly contribute to an increase in aggregate demand (AD), which may offset short-term recessionary gaps. However, government spending does not address the underlying structural issues that contribute to the shock, such as shifts in the short-run aggregate supply (SRAS) or long-run aggregate supply (LRAS) curves. Additionally, increases in government spending require financing, which may compete with private investment for the available loanable funds, potentially increasing interest rates and crowding out private investment.

Increases in Government Spending Are NOT Very Effective in Offsetting