How does an increase in government spending affect aggregate demand in the long run, particularly in relation to interest rates?

When the government increases its spending, it directly boosts aggregate demand, which is the total demand for goods and services in the economy. This increase happens because the government is purchasing more, which means businesses produce more to meet this demand. However, in the long run, this can lead to higher interest rates. As the government borrows money to finance its spending, it competes with other borrowers in the market, which can drive up the cost of borrowing. For example, if the government spends more on building new schools, while this initially helps the economy grow, it may eventually lead to higher interest rates, making it more expensive for families to take out loans for homes or education.