What would happen to aggregate demand if the federal government increased military purchases and state 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 decrease, because only state and local government purchases affect AD.
C)AD would increase if the change in federal purchases were smaller than the change in state and local purchases.
D)AD would decrease if the change in federal purchases was smaller than the change in state and local purchases.

Question

What would happen to aggregate demand if the federal government increased military purchases and state 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 decrease, because only state and local government purchases affect AD.
C)​AD would increase if the change in federal purchases were smaller than the change in state and local purchases.
D)​AD would decrease if the change in federal purchases was smaller than the change in state and local purchases.

Quizplus · Accepted Answer

Both federal government and state and local government purchases affect aggregate demand. An increase in military purchases by the federal government would increase AD, but a decrease in road building budgets by state and local governments would decrease AD. Since the decrease in state and local government purchases is larger than the increase in federal government purchases, AD would decrease overall.

What Would Happen to Aggregate Demand If the Federal Government