In the short run, with prices fixed, how would an increase in government spending affect the DD-AA equilibrium?
A) It will increase output and appreciate the currency.
B) It will increase output and depreciate the currency.
C) It will decrease output and appreciate the currency.
D) It will decrease output and depreciate the currency.
E) It will increase output and have no effect on the currency.

Question

Quizplus · Accepted Answer

An increase in government spending will shift the DD curve to the right, increasing output. However, since prices are fixed in the short run, the increase in output will lead to an increase in demand for goods and services, causing an appreciation of the currency through the international trade effect on the AA curve. Therefore, choice A is the correct answer.

In the Short Run, with Prices Fixed, How Would an Increase