Question : Statement 1: Changes in government spending affect aggregate demand.
Statement 2: Changes in the money supply affect 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
1. Statement 1 is true. Changes in government spending can indeed have an impact on aggregate demand. When the government increases its spending on goods, services, or infrastructure projects, it directly contributes to aggregate demand by increasing the total amount of spending in the economy. Conversely, if the government decreases its spending, it can lead to a decrease in aggregate demand. Therefore, changes in government spending affect aggregate demand.
2. Statement 2 is incorrect.Changes in the money supply typically affect aggregate demand rather than aggregate supply. An increase in the money supply can lead to an increase in aggregate demand by increasing the amount of money available for spending in the economy. However, it does not directly affect aggregate supply, which is determined by factors such as the availability of resources, technology, and production capabilities. Therefore, changes in the money supply primarily influence aggregate demand, not aggregate supply.
As a result, only Statement 1 is correct, while Statement 2 is not.
