📚 Learning Guide
Aggregate Demand and Supply Shifts
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How would a significant increase in government spending, as part of fiscal policy, likely affect aggregate demand if it coincides with an external shock such as a natural disaster?

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Learning Path

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Choose the Best Answer

A

Increase aggregate demand significantly

B

Decrease aggregate demand significantly

C

No change in aggregate demand

D

Increase aggregate supply

Understanding the Answer

Let's break down why this is correct

Answer

When the government significantly increases spending, it usually puts more money into the economy. This can increase aggregate demand, which is the total amount of goods and services people want to buy. If there is an external shock, like a natural disaster, the government might spend more to help rebuild and support affected communities. For example, if a hurricane damages homes, the government could invest in construction and relief efforts, creating jobs and boosting spending. This combination of increased government spending and the need for recovery can lead to a stronger demand for products and services, helping the economy to recover faster.

Detailed Explanation

When the government spends a lot of money, it puts more cash into the economy. Other options are incorrect because Some might think that spending less is needed after a disaster; It's easy to think that spending won't change anything.

Key Concepts

Fiscal Policy
External Shocks
Topic

Aggregate Demand and Supply Shifts

Difficulty

medium level question

Cognitive Level

understand

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