Spending on the war in Afghanistan is essentially categorized as government purchases. How do increases in spending on the war in Afghanistan affect the aggregate demand curve?

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Spending on the war in Afghanistan is essentially categorized as government purchases.  How do increases in spending on the war in Afghanistan affect the aggregate demand curve?

BlackTom AI · Accepted Answer

In this question, we’re examining how increases in government spending on a war, treated as a government purchase, affect aggregate demand.
Option 1: They will move the economy up along a stationary aggregate demand curve. This would imply a movement along a fixed AD curve due to a change in the price level, but increases in government spending are components of aggregate demand that shift the curve itself, not just cause movement along it. Therefore this statement mischaracterizes the impact.
Option 2: hey will move the economy up along a stationary aggregate demand curve. This is the same idea as Option 1 but with a typographical error; the core issue remains: a change in government purchases shifts AD, not cause a vertical or horizontal movement along a fixed curve. The reasoning here is incorrect for the same fundamental reason as Option 1.
Option 3: They will shift the aggregate demand curve to the left. Shifting left would indicate a decrease in aggregate demand, which would occur if spending decreased or there was a negative wealth, confidence, or policy effect. An increase in government purchases represents an expansionary fiscal action, which raises aggregate demand, not lowers it.
Option 4: They will shift the aggregate demand curve to the right. This aligns with standard aggregate demand analysis: higher government spending directly increases overall demand in the economy, shifting the AD curve rightward at every price level. This is the correct interpretation of an increase in government purchases as a component of GDP.
In summary, the main distinction is between movement along an existing curve (which would require a change in the price level) versus shifting the entire curve (which results from a change in an autonomous component of AD, like government spending). The rightward shift correctly captures the expansionary effect of higher government purchases on aggregate demand.

W25 ECON D001 52Z Prin Macroeconomics PracticeFinal

Spending on the war in Afghanistan is essentially categorized as government purchases. How do increases in spending on the war in Afghanistan affect the aggregate demand curve?

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