When government spending increases, the aggregate demand curve shifts to the _____ and the multiplier effect is dampened by a _____ in the aggregate price level.
A) right; fall
B) right; rise
C) left; fall
D) left; rise

Question

Quizplus · Accepted Answer

When government spending increases, the aggregate demand curve shifts to the right because more spending increases the overall demand for goods and services in the economy. The multiplier effect, which amplifies the initial increase in spending through subsequent rounds of spending, is dampened by a rise in the aggregate price level, as higher prices can reduce the real purchasing power of consumers and businesses, thereby tempering further spending.

When Government Spending Increases, the Aggregate Demand Curve Shifts to the _____