Answer to Question #255197 in Macroeconomics for Naho

Question

In the AD-AS model a simultaneous increase in government spending and increase in the price of oil will lead to:

Answer 1

When the government spending increases, the aggregate demand also increases, contributing to higher growth within a short-run. When the oil price goes down, the output will reduce which will be a downward slope within the aggregate demand curve. Therefore, increase in oil price and government spendings may potentially result to increase in inflation rate.