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

An increase in government spending directly influences aggregate demand by increasing it. When the government spends more, it injects additional funds into the economy, which can lead to higher consumption and investment. This spending can take various forms such as infrastructure projects, public services, or social programs, all of which create jobs and stimulate economic activity. As government expenditure rises, it encourages households and businesses to spend more, resulting in a rightward shift in the aggregate demand curve.

This phenomenon is rooted in the basic principles of economics where government spending is one of the components of aggregate demand, represented by the equation AD = C + I + G + (X - M), where G is government spending. Thus, an increase in G leads to an increase in overall aggregate demand, signifying that the economy is moving towards a higher level of output at the current price level.

Other options, such as a decrease in aggregate demand or having no effect, do not hold true because they overlook the fundamental relationship between government spending and economic activity. Furthermore, the impact on supply curves is irrelevant to the core question of aggregate demand, as government spending primarily affects demand rather than supply.