In the short run, if the government attempts to increase aggregate demand, it should
A) increase government spending and reduce taxes.
B) decrease government spending and increase taxes.
C) shift the long-run aggregate supply curve to the right.
D) shift the short-run aggregate supply curve to the right.

Question

Quizplus · Accepted Answer

In order to increase aggregate demand in the short run, the government can increase government spending on goods and services, which will increase demand for goods and services, and also reduce taxes, which will increase disposable income and therefore consumption. This will increase aggregate demand in the short run, as there will be more spending in the economy. Decreasing government spending and increasing taxes would have the opposite effect and lead to a decrease in aggregate demand. Shifting the long-run aggregate supply curve to the right and shifting the short-run aggregate supply curve to the right may both increase the potential output of the economy, but it would not necessarily increase demand in the short run.

In the Short Run, If the Government Attempts to Increase