Question

The federal government tends to increase their spending to get the economy out of recessions. Explain the expected impact on each of the components of aggregate demand due to this and the mechanism through which this operates.

Answer 1

Answer:

Aggregate demand (AD) refers to the total demand for goods and services in an economy in an economy at a given price level.

Components of Aggregate Demand (AD); Consumption (C), Investment (I), Government Spending (G) and Net Exports (X-M).

During the recession, the government can affect aggregate demand by increasing their fiscal expenditures and reduce taxation which is known as Fiscal policy.

Expansionary fiscal policy affects aggregate demand through an increase in government spending and a reduction in taxation. Those factors influence employment and increase household income, which then impacts consumer spending and investment

Fiscal policy determines government spending and tax rates. Expansionary fiscal policy, usually enacted in response to recessions or employment shocks, increases government spending in areas such as infrastructure, education, and unemployment benefits.

Explanation: