A small country is recovering from a recession and begins to increase its government spending significantly. As a result, the aggregate demand curve shifts to the right. How might this shift impact the equilibrium price level and output in the short run, and what could be the potential effect on trading partners' economies?

When a small country increases its government spending, it puts more money into the economy, which boosts overall demand for goods and services. This increase in demand causes the aggregate demand curve to shift to the right, leading to a higher equilibrium price level and increased output in the short run. For example, if the government invests in building new roads, more jobs are created, people earn more, and they spend more on local businesses, which can raise prices. As the country's economy grows, its trading partners may also feel the impact, as they could see increased demand for their exports, leading to growth in their own economies. However, if the demand grows too fast, it might lead to inflation, causing prices to rise even more.