Suppose a country increases government purchases by $100 billion. Suppose the multiplier is 1.5 and the economy’s real GDP is $5,000 billion. In which direction will the aggregate demand curve shift?...

Suppose a country increases government purchases by $100 billion. Suppose the multiplier is 1.5 and the economy’s real GDP is $5,000 billion.

In which direction will the aggregate demand curve shift? And by how much?

Explain using a graph why the change in real GDP is likely to be smaller than the shift in the aggregate demand curve.

May 26, 2022

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