According to the AS-AD model with output starting at the natural rate, an increase in government spending leads to an increase in the equilibrium price level and no change in the equilibrium level of output in the long run.

Question

Quizplus · Accepted Answer

In the long run, according to the AS-AD model, an increase in government spending shifts the aggregate demand curve to the right, leading to a higher price level but the equilibrium level of output returns to the natural rate due to wage and price adjustments, meaning there's no change in the long-run equilibrium level of output.

According to the AS-AD Model with Output Starting at the Natural