Question

Assume that the aggregate demand curve shifts to the right through increased government spending. Assuming that the position of the AD curve changes, how does this event affect the government budget deficit and the foreign trade deficit?

Answer 1

Answer:

The government budget deficit and the foreign trade deficit will increase

Explanation:

The aggregate demand model is a macroeconomic model that show the balance between supply and demand and how they interact with each other. Also, this model shows the effects of fiscal and monetary policy have on aggregate demand.

An increase in government spending (a fiscal policy) will shift the demand curve to the right. However, this increased spending means that the government will have to run a larger budget deficit, while the change in exchange rates means that the foreign trade deficit will increase as well.