A temporary increase in government spending that leads to only a small decline in lifetime wealth likely shifts the output demand curve to the
A)right by less than the rightward shift in output supply.
B)left by less than the leftward shift in output supply.
C)right by more than the rightward shift in output supply.
D)right by the same amount as the rightward shift in output supply.
E)left by more than the leftward shift in output supply.

Question

Quizplus · Accepted Answer

A temporary increase in government spending typically boosts aggregate demand, as it injects more money into the economy. If this increase leads to only a small decline in lifetime wealth, it suggests that consumers do not significantly reduce their consumption. Therefore, the output demand curve shifts to the right. Since the supply side may not immediately or fully adjust to this increased demand (due to factors like production capacities or time lags in investment), the shift in the output demand curve is likely more pronounced than any shift in the output supply curve.

A Temporary Increase in Government Spending That Leads to Only