Since government spending is one of the components of aggregate demand, an increase in government spending will shift the demand curve to the right. A reduction in taxes will leave more disposable income and cause consumption and savings to increase, also shifting the aggregate demand curve to the right.

Does government spending change aggregate supply?

Shifts in the short run aggregate supply curve are caused by changes in inflationary expectations; changes in worker force and capital stock availability; changes in government action (not the same as government expenditure); changes in productivity; and supply shocks.

What happens when government spending increases?

According to Keynesian economics, increased government spending raises aggregate demand and increases consumption, which leads to increased production and faster recovery from recessions. ... The crowding out of private investment could limit the economic growth from the initial increase government spending.