explain the effect of a rise in government expenditure in the AD-AS framework

A rise in government expenditure shifts the aggregate demand to the right (Insert graph). We assume that there is no change to the aggregate supply and that this is a one time increase. In the short-run both aggregate price levels and real output increase. The economy is expanding. However this is not an equilibrium situation.In the long-term, this economy adjusts to the temporary positive shock in aggregate demand and it reverts to its original equilibrium level, i.e. the aggregate price level and the level of real output before the shift.

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Answered by Caroline A. Economics tutor

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