Consider a permanent increase in government consumption. Use the market clearing model to determine the effects, if any, on aggregate demand for goods ???? ???? , aggregate supply of goods ???? ???? , and the real interest rate ???? if the permanent increase in government consumption is financed by raising lump-sum taxes. Be sure to explain your answers.

With increase in the government spending both the IS curve and AD curve shifts rightwards leading to increase in aggregate demand, real gdp and real interest rate. However increase in the lumpsum taxes will negate the increase by causing leftward shift of both the IS and AD curve.

But the gdp can increase if the rightward shift caused by increase in government soending is more than leftward shift caused by increase in lumpsum taxes.In a recession, consumers may reduce spending leading to an increase in private sector saving. Therefore a rise in taxes may not reduce spending as much as usual.The increased government spending may create a multiplier effect. If the government spending causes the unemployed to gain jobs then they will have more income to spend leading to a further increase in aggregate demand. In these situations of spare capacity in the economy, the government spending may cause a bigger final increase in GDP than the initial injection.However, if the economy is at full capacity, the increase in government spending would tend to crowd out the private sector leading to no net increase in Aggregate demand from switching from private sector spending to government sector spending.