Which statement(s) about fiscal policy and aggregate demand is/are correct? I. A reduction in unemployment compensation would increase aggregate demand.
II) An increase in government spending would increase aggregate demand.
III) An increase in government spending would increase aggregate demand and lead to a permanent increase in aggregate output if government spending is implemented when the economy is in long-run equilibrium.

Question

Quizplus · Accepted Answer

II is correct because an increase in government spending directly increases aggregate demand by injecting more money into the economy. However, I is incorrect because a reduction in unemployment compensation would likely decrease aggregate demand by reducing the income of unemployed individuals, leading to lower consumption. III is incorrect because while an increase in government spending can temporarily increase aggregate output, especially if there are idle resources, it does not necessarily lead to a permanent increase in aggregate output if the economy is already at long-run equilibrium, as the long-term effects could be offset by inflation, interest rate changes, or crowding out of private investment.

Which Statement(s) About Fiscal Policy and Aggregate Demand Is/are Correct