Final answer:
When Congress increases spending, Dynamic Aggregate Demand shifts to the right, resulting in higher output, lower unemployment, and potential inflationary pressure.
Step-by-step explanation:
If Congress decides to spend a lot of extra money over the next two years, in the short run we would likely see a shift in the Dynamic Aggregate Demand curve to the right due to an increase in spending. This shift would be a reflection of higher government spending leading to additional aggregate demand. According to short-run Keynesian analysis, this increase in aggregate demand results in a new equilibrium at a higher output level, lower unemployment, and an inflationary pressure on the price level. Therefore, the answer to the student's question is: d. Dynamic Aggregate Demand shifts to the right due to an increase in velocity growth.
In the short run, if Congress decides to spend a lot of extra money over the next two years, dynamic aggregate demand will shift to the right due to an increase in velocity growth. This means that there will be an increase in overall spending in the economy, leading to a higher level of demand for goods and services. As a result, there will be higher output, lower unemployment, and a pressure for an inflationary rise in the price level.