In the basic model that includes the AD and LRAS curves only, increased spending growth causes:

Question

Quizplus · Accepted Answer

According to the basic model of AD and LRAS curves, increased spending growth will shift the AD curve to the right, causing both prices and output to increase. However, LRAS curve remains unchanged, so there is no change in the potential output of the economy, which means there is no change in the real growth rate. Therefore, the increased spending growth will only cause a higher inflation rate but not a change in the real growth rate.

In the Basic Model That Includes the AD and LRAS