Final answer:
A government program that invests in public infrastructure and is aimed at increasing future productivity can lead to an increase in consumption demand due to expected higher future incomes, boost investment demand due to anticipated higher returns, and ultimately raise output demand as firms respond to higher consumption and investment. This results in an expanded economy.
Step-by-step explanation:
When a government announces a new program investing in public infrastructure, which will be funded by lump sum tax and increase future productivity, there are several effects on economic demand components. The shock of increased government spending (G) and increased future productivity (z') generally affects consumption demand, investment demand, and output demand. Consumption demand is likely to rise due to expectations of higher future income from increased productivity, despite the immediate impact of a lump sum tax which may reduce disposable income. However, if consumers anticipate better future economic conditions and higher incomes, they might still increase consumption.
Investment demand is also expected to increase as businesses anticipate higher productivity and future profits due to improved infrastructure. This makes current investment more appealing, expecting it to yield higher returns in the future. It can also attract foreign investment, driven by the same incentive. Finally, the output demand is expected to rise as both consumption and investment demands increase. With improved infrastructure leading to higher productivity, firms can produce more efficiently, satisfying the increased demand with higher output levels.