-Refer to the above figure. Suppose that the economy initially is operating along AD₁. If the government seeks to close the recessionary gap by raising government spending without any change in taxation, which moves the aggregate demand curve from AD₁ to AD₂, then to AD₃. Which of the following scenarios is TRUE?

Question

Quizplus · Accepted Answer

When the government increases spending, aggregate demand increases, leading to higher interest rates as the demand for money rises. Higher interest rates typically result in reduced investment.

-Refer to the Above Figure