Question

Use the AD/AS model to show how increases in government spending can lead to more inflation.

Short answer

The AD curve shifts to the right as government expenditure increases, resulting in higher income and prices.

Step-by-step solution

Step 1. Define AD/AS model

The aggregate demand–aggregate supply model, also known as the AD–AS model, is a macroeconomic model that examines the relationship between aggregate demand and aggregate supply to explain price levels and production.

Step 2. How increases in government spending can lead to more inflation?

Increased government spending is expected to result in a rise in aggregate demand (AD). This could lead to faster growth in the short term. It carries the risk of causing inflation. The AD curve shifts to the right as government expenditure increases, resulting in higher income and prices.