According to the basic AD/AS model, an increase in government spending:
A) increases employment but reduces income levels.
B) changes the composition of aggregate demand and increases the price level.
C) decreases the level of both aggregate demand and prices.
D) increases aggregate demand but lowers the price level.

Question

Quizplus · Accepted Answer

An increase in government spending shifts the aggregate demand curve to the right, which changes the composition of aggregate demand (more government spending relative to other components) and typically increases the price level due to higher demand in the economy. This is a basic implication of the AD/AS (Aggregate Demand/Aggregate Supply) model in macroeconomics.

According to the Basic AD/AS Model, an Increase in Government