Answer to Question #206732 in Macroeconomics for Lila

Question

With its expenditures and paying salaries to its employees, the government plays an integral part in changes of aggregate demand. True or false?

Answer 1

Solution:

The statement is True.

This is because government expenditure which refers to money spent by the public sector on the acquisition of goods and services such as healthcare, defense, education, and infrastructure, including wages and salaries to employees impacts aggregate demand.

Government expenditure is one of the aggregate demand components, as such, an increase in government spending will increase aggregate demand and shift the demand curve to the right. On the other hand, when government spending decreases, aggregate demand will decrease and shift the demand curve to the left.