Answer to Question #13979 in Economics of Enterprise for Saima

Question

The government of a country experiencing a recession is considering an increase in the level of government spending (purchase) in order to raise the level of the country's output, financed by borrowing. Using the short-run aggregates supply (AS) - aggregate demand (AD) model, provide a short report for the Minister of Finance discussing whether such a policy would be effective (in the short run). your report must be divided into the subsections (a) to (e) indicated below. these must be labelled clearly.

a) the initial impact of an increase in government spending.
b) the multiplier effect (assuming no crowding out).
c) the crowding -out effect
d) the net export effect
the final effect on the price level and output