Hi, I'm struggling with this economics multiple choice graph question. The answer is
A but I don't understand how an increase in government spending on infrastructure would cause a shift in aggerate demand. Wouldn't it rather be a decrease in budget deficit????
View attachment 31856
A decrease in budget deficit means the size of the deficit is getting smaller, meaning less spending. So, in fact, more infrastructure investment will result in more spending, hence deficit increasing. As to why it's A, well B is incorrect (as aforementioned), C is incorrect because contractionary MP decreases AD, and D is incorrect because more tax is more leakage --> decrease AD + economic activity. So that means A is correct, because infrastructure --> jobs/private investment --> income --> consumption --> AD. Also infrastructure is a form of government expenditure, G, meaning increased AD (AD = C+I+G+X-M)