Question : Statement 1: An increase in government spending will lead to a shift in aggregate demand.
Statement 2: An increase in wages 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: Both Statement 1 and Statement 2
Solution : The correct answer is (C) Both Statement 1 and Statement 2
Statement 1 is correct. An increase in government spending directly affects 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 also correct. An increase in wages affects the cost of production for businesses, which can impact aggregate supply. When wages increase, it leads to higher production costs for businesses. As a result, businesses may reduce their supply at the existing price level, causing a leftward shift of the aggregate supply curve. Conversely, if wages decrease, it can lead to lower production costs, potentially resulting in an increase in aggregate supply and a rightward shift of the aggregate supply curve.
Therefore, both Statement 1 and Statement 2 are correct.
