What effect does an increase in government spending have on aggregate demand?

An increase in government spending directly increases aggregate demand by injecting money into the economy. When the government spends more on goods and services, it creates demand for those items, which in turn stimulates economic activity. This spending can take various forms, such as infrastructure projects, education, healthcare, or defense.

As the government purchases these services and goods, it leads to higher income for the workers involved in the production and provision of those goods and services, which can further increase consumption. Businesses may also respond to this increased demand by hiring more employees or increasing production capacity, compounding the effect on aggregate demand.

This cascading effect is a key component of how fiscal policy operates within the economy. The government acts as a crucial player in boosting economic activity, especially during downturns, by enhancing overall demand levels. Thus, an increase in government spending has a significant positive impact on aggregate demand.