Answer to Question #252017 in Macroeconomics for Leroy

Question

in the AD-AS model a simultaneous increase in government spending and increases in the price of oil will lead to?

Answer 1

An increase in government spending will cause a rise in aggregate demand. This leads to higher growth in the short run, but it can potentially lead to inflation.

An increase in the price of oil leads to an upward shift in the aggregate supply curve and this results in the raise of prices, the output falls along the downward sloping aggregate demand curve.

Thus in the AD-AS model, a simultaneous increase in government spending and increase in oil price will lead to a potential increase in the rate of inflation.