Answer to Question #120413 in Macroeconomics for Shegofatso

Question

Fiscal policy can be used in the keynesian model to achieve a higher income level. With the aid of a graph , explain how government expenditure can be used to achieve this higher level of aggregate income

Answer 1

Increase in government spending can cause rise in aggregate demand (AD) which leads to higher growth in the short term. It can also lead to inflation.

Higher government spending will also have an impact on the supply side of an economy. This depends on which sector the government spending is increased. For instance if spending is focused on improving infrastructure, this could lead to increased productivity and a growth in the long-run aggregate supply. When the infrastructure is improved the income of individuals is likely to increase.