Final answer:
Increases in government spending can lead to more inflation depicted in the AD/AS model by shifting the aggregate demand curve to the right, thereby causing higher price levels, particularly when the economy is at full capacity. This scenario matches option b) Shift AD rightward, causing inflation. Other changes in government spending or energy prices would lead to different shifts in AD or AS, affecting inflation differently.
Step-by-step explanation:
To show how increases in government spending can lead to more inflation using the AD/AS model, we analyze changes in aggregate demand (AD) and aggregate supply (AS). Inflationary pressures can arise when aggregate demand increases, especially when the economy is at potential output. At this point, the AS curve is vertical, indicating that increases in AD lead to higher price levels without an increase in real GDP.
An increase in government spending shifts the AD curve to the right. This is depicted as moving from AD0 to AD1 in the AD/AS diagram. When the AD curve shifts rightward due to increased government spending, the new macroeconomic equilibrium will be at a higher price level, indicating inflation. This is because the economy is already operating at full capacity, and any additional demand can only lead to higher prices. This situation is represented in option b) Shift AD rightward, causing inflation.
For completeness, other scenarios include a decrease in government spending (option a), which would shift AD leftward and potentially cause deflation. A decrease in energy prices (option c) would lead to a rightward shift in AS, increasing GDP at a lower price level. And finally, a continual increase in AD could lead to ongoing inflation if people begin to expect inflation, resulting in rising wages and prices (option d).