The government spends $3 billion to buy police cars. Explain why aggregate demand might increase by more than $3 billion. Explain why aggregate demand might increase by less than $3 billion.

When the government spends $3 billion on police cars, that purchase has repercussion. The impact of the higher demand from the government is to raise employment and profits at the firm that produce. Then, as the workers see higher earnings, the firm owners see higher profits, To increase in income by raising their own spending on goods. As a result, the government raises the demand for the products of many other firms in the economy.