In the aggregate demand and aggregate supply model which of

In the aggregate demand and aggregate supply model, which of the following is likely to increase the overall price level and increase aggregate output? increase government expenditures and taxes decrease government expenditures and taxes. increase government expenditures and decrease taxes. decrease government expenditures and increase taxes None of the above is correct.

Solution

Answer:

The answer is option c

Increase government expenditures and decrease the taxes.

Increasing the government expenditure will add more money to the economy so this increases the income of the people and the increase in the income will raise the aggregate demand in the economy. This is a rightward shift of the aggregate demand curve and there will be rise in prices and increase in output. Also the decrease in the tax has the same effect. `The decrease in the tax increases the disposable income of the people and there by increasing the aggregate demand in the economy.