How does an increase in government expenditure affect Real GDP in the short-run?

Government Expenditure is an injection into the circular flow of income and can be represented in an Aggregate Demand/Aggregate Supply Diagram as an increase in aggregate demand. (Shows on diagram shift in aggregate demand). This increase, can simultaneously be shown by looking at the components of the aggregate demand equation, AD = C + I + G + X - M. Hence, an increase in government expenditure 'G' will increase the Aggregate Demand.The effect of this can then easily be seen on the diagram. There will be an increase in Real GDP, which will consequently come with an increase in the average price level (also known as inflation).

Answered by Antonio F. Economics tutor

2212 Views

See similar Economics IB tutors

Related Economics IB answers

All answers ▸

What is the effect of the imposition of a tax on high-sugar drinks in the UK?


If a country wishes to depreciate their own currency, how could they do so in terms of monetary policy? List three possible effects depreciating their currency will have on the economy.


What are the ways to combat high inflation?


What is the crowding out effect and what does it mean for how effective fiscal policy is?


We're here to help

contact us iconContact usWhatsapp logoMessage us on Whatsapptelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

© MyTutorWeb Ltd 2013–2024

Terms & Conditions|Privacy Policy