How does an increase in government spending generally impact aggregate demand?

An increase in government spending generally impacts aggregate demand positively, as it leads to an increase in overall economic activity. When the government spends more, it injects money into the economy by purchasing goods and services, which can include infrastructure projects, education, defense, and healthcare, among others. This spending creates demand for these goods and services, thereby stimulating production and employment.

As businesses respond to the increased demand by hiring more workers and expanding their output, consumer confidence can rise, leading to an increase in private consumption. Additionally, government spending can have a multiplier effect, where the initial increase in spending leads to further rounds of spending as recipients of that money (like workers and suppliers) also spend their income.

When government expenditure rises, it shifts the aggregate demand curve to the right, indicating higher total demand at every price level. Thus, the overall result is an increase in aggregate demand, which corresponds with the correct answer.