Fiscal Policy: Government Expenditures & Revenues, Budget, National Debt

Fiscal Policy: Government Expenditures & Revenues, Budget, National Debt

Effect of Government Purchases On Aggregate Demand

A number of aggregate demand determinants are presented that affects the aggregate demand curve when change. These determinants are mainly categories in four groups: investment expenditure, consumption expenditure, government purchases, and net exports. So, a change in any of these determinants causes a shift in demand curve. This clearly indicates that change in government purchases affects the aggregate demand. Government purchases refer to the expenditure made by government sector on gross domestic product, or in simple words, on final goods and services. Government purchases include expenditure on goods and services required to operate the government like administrative salaries and to provide public goods such as national defense and highway construction (Boyes & Melvin, 2010).

These types of purchases include in government spending, but there is another one 'transfer payments'. Government purchases are financed through 3 levels of government: state, federal, and local governments. So, it is one of the four government expenditures on GDP. The other 3 include investment expenditure, consumption expenditure, and net exports. Government purchases particularly include actual expenditure on final goods and services or GDP by the government sector, which specifically excludes transfer payments (Mankiw & Taylor, 2006). Thus, it is clearly evident that all types of government purchases affects the aggregate demand, and thereby, change in any of them shift the demand curve.

Aggregate Demand Curve & Real GDP

Shift in Aggregate Demand Curve

When the government purchases increase, it affects the aggregate demand curve. The initial impact of $100 billion increase in purchases of the government directly shifts the aggregate demand curve to rightward. The multiplier impact then causes the aggregate demand curve to shift out $ 150 billion further. As the multiplier (MPC) is ...