If government purchases increase and net taxes decrease,
A)the price level will fall
B)the money supply must rise
C)the aggregate demand curve shifts leftward
D)aggregate supply shifts rightward
E)output and employment will increase

Question

Quizplus · Accepted Answer

When government purchases increase, it leads to an increase in aggregate demand. Simultaneously, when net taxes decrease, it puts more money in people's pockets and increases their disposable income. Consequently, people will spend more, leading to an increase in demand for goods and services. This increase in aggregate demand leads to an increase in output and employment. Therefore, the correct choice is E.

If Government Purchases Increase and Net Taxes Decrease