Question : Statement 1: An increase in government spending will lead to a rightward shift in the aggregate demand curve.
Statement 2: An increase in aggregate supply will lead to a decrease in the price level.
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:
Only Statement 1
Solution : The correct answer is (A) Only Statement 1
Statement 1 is correct. An increase in government spending directly contributes to aggregate demand. When the government spends more on goods, services, or infrastructure projects, it increases the total amount of spending in the economy. This leads to a rightward shift of the aggregate demand curve, indicating an increase in the overall demand for goods and services at each price level.
Statement 2 is incorrect. An increase in aggregate supply typically leads to a decrease in the price level, not the other way around. When the aggregate supply increases, it means that more goods and services are available in the economy. This increased supply, if not matched by an increase in aggregate demand, can lead to downward pressure on prices due to increased competition among sellers. However, it's important to note that this relationship is not always absolute, as other factors such as changes in demand, input costs, and market conditions can also influence price levels.
Therefore, only Statement 1 is correct, while Statement 2 is not.
