Final answer:
Increased spending on domestic infrastructure by Congress will shift the aggregate demand (AD) curve to the right. This will potentially lead to an increase in real GDP and price level. The immediate effect does not shift the aggregate supply (AS) curve, only the AD curve. Option a is the correct answer.
Step-by-step explanation:
Impact of Increased Spending on Domestic Infrastructure on the Economy
When Congress decides to increase spending on domestic infrastructure with the intention to upgrade the nation's infrastructure, it affects the elements of aggregate demand—consumption (C), investment (I), government spending (G), and net exports (X-M). Specifically, it influences the government spending component of the aggregate demand formula. According to the AD/AS model in economics, when there is an increase in any of these components of aggregate demand, the aggregate demand (AD) curve will shift to the right. This shift represents an increase in the total amount of goods and services demanded at each price level.
An increase in government spending typically leads to a rise in the equilibrium quantity of output and the price level, depending on where the curve intersects with the aggregate supply (AS) curve. However, such policy changes do not inherently affect the position of the AS curve in the short term. The AS curve could eventually shift if there are long-term improvements in productivity or alterations in the cost of inputs due to extensive infrastructure investments, but this would not be an immediate effect of the change in government spending itself.
Therefore, regarding the provided options, the correct option is (a): It shifts the aggregate demand (AD) curve to the right. This is the immediate effect of increased government spending on infrastructural projects, leading to a potential increase in real GDP and price level in the economy.