Answer to Question #37797 in Macroeconomics for Cheyanne Griffin

Question

According to the AD-AS model in Chapter 9, what are the short run and long run
effects of each of the following? An increase in government purchases. A
decrease in taxes. An increase in the money supply. A decrease in consumer or
investment spending.

Answer 1

Keynesian economics suggest that increasing government spending and decreasing tax rates will stimulate aggregate demand.

Thus expansionary monetary policy (i.e., an increase in the money supply) will cause a decrease in average interest rates in an economy. Note this result represents the short-run effect of a money supply increase. The short run is the time before the money supply can affect the price level in the economy.

When the businesses investment spending is decreased, the aggregate expenditures decrease, and so does the aggregate demand.