Question

If an increase in government spending shifts AD more than an increase in business taxes shifts SRAS, what will happen to price level and output?

Answer 1

Both price level and output will increase.

Step-by-step explanation:

If there is an increase in the government spending then as a result there is an increase in aggregate demand which shifts the aggregate demand curve rightwards.

And, an increase in the business taxes will decrease the aggregate supply and this change would shift the aggregate supply curve leftwards.

Now, if the magnitude of shift in aggregate demand curve is more than the shift in short run aggregate supply curve then as a result this will increase both the price level as well as the level of output.