Question

An increase in government spending initially and primarily shifts

a. aggregate demand to the right.
b. aggregate demand to the left.
c. aggregate supply to the right.
d. neither aggregate demand nor aggregate supply in either direction.

Answer 1

The correct answer is option a.

Step-by-step explanation:

The aggregate demand in an economy comprises of consumer spending, government spending, investment expenditure, and net exports.

An increase in any of these components will cause the aggregate demand to increase or decrease.

So when the government spending increases the aggregate demand will increase. This increase in the aggregate demand will cause the aggregate demand curve to shift to the right.

This rightward shift in the aggregate demand curve will cause the price level and equilibrium quantity to increase.