Explain how a change in Government spending may affect the average price level and real GDP

Government spending is the total expenditure by the Government on the public sector in an economy. An increase of this is known as expansionary fiscal policy. This increases aggregate demand, causing a shift in the aggregate demand curve to the right. This results in a new macroeconomic equilibrium, with an increase in the average price level, which is called demand pull inflation. The shift in the AD curve is also accompanied by an increase in Real GDP which is economic growth. (Diagram)