Answer to Question #97456 in Macroeconomics for Anju Rani

Question

Use the model of aggregate demand and short run aggregate supply to explain how an increase in government purchases affects real GDP and price level in shortrun

Answer 1

When the aggregate demand increases (aggregate demand curve shift to the right), the real GDP increases and the price levels also increase. On the other hand, when aggregate demand decreases (aggregate demand curve shift to the left) the real GDP decreases and the price levels decrease. In the short-run the aggregate supply is graphed as an upward sloping curve. For any changes in the short-run aggregate supply it results to a drop in the price levels of goods ad services while the real GDP increases