Which of the following best explains why an unexpected increase in total spending will cause an increase in GDP?

• A. Higher total spending increases aggregate demand, leading to higher production and GDP.
• B. Unexpected spending increases imports, which directly raises GDP.
• C. Total spending only affects inflation, not GDP.
• D. An increase in total spending reduces aggregate supply, causing GDP to rise.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the relationship between total spending and aggregate demand. Total spending in an economy is a key component of aggregate demand (AD), which represents the total demand for goods and services at different price levels.
2. Step 2: Recognize that an unexpected increase in total spending shifts the aggregate demand curve to the right. This means that at every price level, the quantity of goods and services demanded increases.
3. Step 3: Analyze the short-run effects of this rightward shift in aggregate demand. Firms respond to higher demand by increasing production, which leads to an increase in real GDP.
4. Step 4: Note that imports are a leakage from the spending stream and do not directly increase GDP. Instead, higher total spending primarily boosts domestic production through increased aggregate demand.
5. Step 5: Understand that aggregate supply is not reduced by an increase in total spending; rather, the increase in aggregate demand is what drives the rise in GDP in the short run.