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5. The administration has announced intentions to spend in excess of one trillion dollars on infrastructure....

5. The administration has announced intentions to spend in excess of one trillion dollars on infrastructure. Using an Aggregate-Demand/Aggregate-Supply graph demonstrate how this spending plan will affect the economy.

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Answer #1

Increased government expenditure will increase the income and demand in the economy. This will shift the aggregate demand curve to the right at a higher level of output and higher price.

As per the graph above the economy was initially at equilibrium at point E1. Here, the AD1 meets the SRAS1 and LRAS. At this point the prices are P1 and output is Yf1. After an increase in the expenditure by the government on infrastructure the AD1 will shift to AD2. The new equilibrium will be at E2 at higher price P2 and higher output Yf2.

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