Final answer:
The incorrect assumption about the AS/AD model is that the size of the government debt doesn't matter. In reality, the AS/AD model accounts for the impact of government borrowing on the economy.
Step-by-step explanation:
The assumption that is not one of the assumptions of the AS/AD model is C) The size of the government debt doesn't matter. In contrast, the AS/AD model assumes that the government's fiscal policy, including debt size and deficit spending, can have various impacts on the economy. These can range from crowding out private investment to influencing inflation and economic growth.
The model acknowledges that government borrowing can affect private savings, investment in physical capital, and the trade balance, and that the optimal level of fiscal policy is often unclear and subject to controversy. Therefore, the size of the government debt does matter as it can lead to macroeconomic outcomes that affect aggregate demand and supply.