Suppose that the federal administration plans to fight a deep, ongoing recession with a nationwide plan of increasing infrastructure. Congress approves it and adjusts the budget accordingly to put the plan in motion immediately. Aggregate demand spending components include consumption (C), investment (I), government (G), and exports (X) minus imports (M). Analyze what the aggregate demand and aggregate supply model predicts about the infrastructure plan to answer three questions.

Complete Questions:

Suppose that the federal administration plans to fight a deep ongoing recession with a nationwide plan of increasing infrastructure. Congress approves it and adjusts the budget accordingly to put the plan in motion immediately. Aggregate demand spending components include consumption (C), investment (I), government (G), and exports (X) minus imports (M). Analyze what the aggregate demand and aggregate supply model predicts about the infrastructure plan to answer the following three questions.

1. What happens to the level of G

(a. it can increase (+), b. decrease (-) or c. stay constant (0)).

2. What likely happens to the aggregate demand curve?

a. The curve shifts to the left (A decrease in AD)

b. The curve shifts to the right (An increase in AD)

c. The curve remains in the same spot

3. What likely happens to the level of unemployment?

a. unemployment decreases

b. unemployment remains the same

c. unemployment increases

Answer:

1. option a

2. option b

3. option a

Explanation:

1. Level of government spending will increase. Option A.

2. It will shift to the right. Option B.

3. Unemployment will decrease. Option A. This is because as AD increases firms will employ more workers to produce more output. Thus, unemployment will decrease.