What would happen to aggregate demand (AD)if the federal government increased military purchases and provincial and local governments decreased their road building budgets at the same time?
A)AD would increase, because only federal government purchases affect AD.
B)AD would increase if the change in federal purchases were smaller than the change in provincial and local purchases.
C)AD would decrease, because only provincial and local government purchases affect AD.
D)AD would decrease if the change in federal purchases were smaller than the change in provincial and local purchases.

Question

Quizplus · Accepted Answer

Aggregate demand (AD) is the total amount of goods and services that households, firms, the government, and foreign buyers want to buy at various price levels. If the federal government increases military purchases, this will increase government spending which will increase AD. However, if provincial and local governments decrease their road building budgets, this will decrease government spending which will decrease AD. Since both actions occur simultaneously, the net effect will depend on the relative size of the two changes. If the decrease in provincial and local government purchases is larger than the increase in federal government purchases, then AD will decrease overall. Therefore, the best answer is D.

What Would Happen to Aggregate Demand (AD)if the Federal Government