Homework Answers
An increase in government shifts the aggregate demand curve right. In the short run, the economy reaches an equilibrium where both GDP and inflation are higher. But in the long run, inflation increases further but GDP goes back to its original level.
See the graph. AD curve shifts to AD'. Economy moves from point A to point B. Higher GDP and higher prices- inflation. But this is only in the short run. In the long run the AS curve now shifts from AS to AS'. The economy ends up at point C. GDP is unchanged, but inflation is significant.
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