Explain how an increase in government spending would affect the DD-AA schedule in the short run
What will be an ideal response?
An increase in government spending will increase aggregate demand, which will shift the DD to the right. If AA remains unchanged, the new equilibrium will be at a higher Y and lower E. Since E is the nominal exchange rate, a lower E is an appreciation of the currency.
You might also like to view...
A firm's total product curve shows that at first it has
A) economies of scale and then diseconomies of scale. B) diseconomies of scale and then economies of scale. C) increasing marginal returns and then diminishing marginal returns. D) diminishing marginal returns and then increasing marginal returns.
Economic growth in China ________
A) would have been impossible in the absence of its impressive record of financial development B) occurred despite limited domestic financial development C) can continue indefinitely without additional financial development D) has occurred despite a relatively low domestic saving rate