Question : Statement 1: An increase in government spending will lead to a movement along the aggregate demand curve.
Statement 2: An increase in wages will lead to a movement along the aggregate supply curve.
Which statement is correct?
Option 1: Only Statement 1
Option 2: Only Statement 2
Option 3: Both Statement 1 and Statement 2
Option 4: Neither Statement 1 nor Statement 2
Correct Answer: Neither Statement 1 nor Statement 2
Solution : The correct answer is (D) Neither Statement 1 nor Statement 2
Statement 1: An increase in government spending will lead to a movement along the aggregate demand curve.
The correct interpretation is that an increase in government spending will shift the aggregate demand curve to the right, rather than causing a movement along the curve. When the government increases its spending, it directly increases the demand for goods and services, shifting the aggregate demand curve to the right.
Statement 2: An increase in wages will lead to a movement along the aggregate supply curve.
The correct interpretation is that an increase in wages will shift the aggregate supply curve, rather than causing a movement along the curve. When wages increase, the cost of production for businesses rises, leading to a decrease in aggregate supply. This results in a leftward shift of the aggregate supply curve.
Therefore, the correct answer is (D) Neither Statement 1 nor Statement 2
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