Final answer:
An increase in government purchases in a self-regulating economy shifts aggregate demand, likely increasing output, price level, and employment due to the multiplier effect, but the actual impact varies with economic conditions.
Step-by-step explanation:
When the self-regulating economy experiences a sudden increase in government purchases, this leads to a shift in aggregate demand. As a result, assuming that all else remains constant, the new equilibrium in the economy will show an increase in the overall level of output. This happens because an increase in government spending directly adds to aggregate demand, and through the multiplier effect, the impact of this additional spending is amplified as it cycles through the economy.
The rise in aggregate demand typically leads to higher output and income levels, as businesses ramp up production to meet the increased demand. That, in turn, is likely to lead to an increase in the price level, potentially causing inflation if the demand increases outpace the ability of the economy to supply goods and services. Regarding employment, when output increases, firms often require more labor, which is likely to lead to an increase in employment levels, as more workers are needed to produce the higher amount of goods and services.
However, it's important to note that these effects can differ depending on the existing economic conditions, such as the level of unused capacity in the economy, the state of business confidence, and the responsiveness of supply to changes in demand.