How can an increase in government spending affect the economy?
Government spending (G) is a component of aggregate demand. The aggregate demand (AD) equation is Y = C + I + G + NX. It measures the total demand for goods and services in the economy. Using a diagram we can draw AD and show how a shift in G will affect the macroeconomy. (show on diagram). Thus an increase in G increases inflation and national income by increasing aggregate demand.
Related Economics A Level answers
All answers ▸Assess how important government policies, other than taxation, are to a business when deciding where to locate its operations. (12)
Why do firms only make normal profit in a perfectly competitive market?
Why does a monopoly equate marginal revenue and marginal cost?
Evaluate the impact of the increase in the number of public sector employees on the UK economy (12)