Consider an economy in a recession. The government wishes to increase government expenditure to boost demand and output. But the opposition claims that the policy will increase the budget deficit excessively and, thus, suggest that taxes rise by as much as the government expenditures. What happens to output if the government increases government expenditures or if the government follows the suggestion of the opposition?
(a) Using the appropriate diagrams, answer the question in the context of the IS-LM model.
(b) Using the appropriate diagrams, answer the question in the context of the AD-AS model in the short run. Are the predictions different from those of the IS-LM model? Explain.