Question : Statement 1: An increase in government spending will lead to a shift in aggregate demand.
Statement 2: An increase in taxes will lead to a shift in aggregate supply.
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. When the government increases its spending, it directly contributes to aggregate demand by increasing the total spending in the economy. This shift in government spending affects various sectors and can lead to changes in consumption, investment, and net exports, resulting in a shift in aggregate demand.
Statement 2 is incorrect. Changes in taxes typically have a direct impact on individuals and businesses' disposable income and can affect their spending and saving decisions. However, taxes do not directly cause a shift in the aggregate supply curve. Aggregate supply is primarily influenced by factors such as technology, input prices, and production capacity.
Therefore, the correct answer is A) Only Statement 1. I apologize for any confusion caused by my previous response.
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