Scribd Logo
Upload

Welcome to Scribd!

  • 2 views

    Topic 4157

    Uploaded by

    Richard mwana

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    Topic 4157

    Uploaded by

    Richard mwana
    2 views1 page

    Original Title

    TOPIC 4157

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    2 views1 page

    Topic 4157

    Uploaded by

    Richard mwana

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    You are on page 1of 1

    TOPIC 4157

    Description

    Suppose that the government reduces spending on construction sector by $15 billion. Which way does

    the aggregate-demand curve shifts? Explain why the shift might be larger than $15 billion. Explain why

    the shift might be smaller than $15 billion.

    ANSWER

    In reference to the provisions of the multiplier effect, an initial increase in any government expenditure

    leads to an increase in the aggregate demand through multiple times reliant on the prevailing marginal

    propensity to consume or save.

    Thus, in this case, a reduction of the government spending by $15 on the highway construction

    decreases the demand for the output due to reduction of the employment level. Reduced employment

    rate lowers the household’s income and expenditure level, thereby, leading to a fall in demand for

    commodities and services. Thus, a reduction on the government expenditure on the highway leads to a

    leftward shift in the households’ aggregate demand. 

    The resulting leftward shift on the aggregate demand curve may be more than $15 billion as a result of

    the multiplier effect being greater that the resulting crowding out effect.  On the other hand, the

    leftward shift of the aggregate demand curve might be less than $15billion as a result of the crowding

    effect being greater than the resulting multiplier effect. 

    You might also like