Infrastructure Spending Boosts Long-Run Supply

Steps:

• Government spending on infrastructure directly finances projects that improve transportation, energy, and productivity.
• This enhances the economy's productive capacity, shifting the aggregate supply curve rightward.
• In the long run, these investments increase potential output without altering the level of aggregate demand.
• Short-run demand effects are offset by financing mechanisms like taxes or bonds, keeping AD stable.

Why C is correct:

• Aggregate supply increases due to higher capital stock and efficiency, per the long-run aggregate supply model where LRAS shifts right with productivity gains.

Why the others are wrong:

• A: Aggregate demand does not decrease; spending injects funds into the economy.
• B: Aggregate supply does not decrease; infrastructure expands capacity.
• D: Identical to C, but listed separately—likely a duplication error.

Final answer: C