Chapter 4R, Problem 1MCQ

To determine

The effect on demand or supply if the federal government decreases the spending on defense.

Explanation of Solution

Explanation for the correct option:

A decrease in federal government defense spending will shift the aggregate demand curve leftward. This can occur in the short run as in that situation inflation reduces and output also reduces, this leads to a leftward shift in the demand curve.

Explanation for incorrect options:

A decrease in government spending in the defense sector does not rightward shift the demand curve instead this rightward shift in the demand curve will occur when government increases the spending.

An increase or decrease in the government decreases the spending on the defense sector as this situation affects the demand curve.

In the long run, the supply curve will not change due to government spending on defense.

The spending of the government on defense leads to no change in the supply curve in long run.

Thus, option ‘b’ is the correct answer.

Economics Concept Introduction

Demand refers to the number of goods and services purchased by consumers during a given time period. Supply refers to the goods produced and sold by the producers. Both demand and supply can be explained with the help of the graph to depict a clear picture of the economy.