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How does fiscal stimulus work? AS held constant, whats the impact of fiscal stimulus on real GDP and the price level?
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Answer #1

Government expenditure is part of the aggregate demand in the market and when government in the market increase the spending the aggregate demand increase directly, this increase in the aggregate demand will shift the demand curve to the right and the new equilibrium will be at a higher price and higher output.

Apart from that, a decrease in the taxes will also shift the AD curve to the right by increasing the AD of the economy.

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