The subject says it all…I know it seems fairly elementary, but I can’t seem to figure it out… Thanks in advance.
I believe aggregated demand is measured by C + I + G + X - M, so as G (government spending) or C/I/X increase, aggregate demand is increasing
Example: The government decides it will build a bridge for xyz city. It has to spend money to buy the materials from businesses, which will create income for the people working in those businesses. The government is also going to have to hire people to build the bridge, so it will create jobs and thus increase income of these workers. All of this increased income will allow people to spend more money which increases the aggregate demand of the country. Another example is transfer payments such as welfare and social security. If the government decides it will increase social security and welfare benefits (increased government spending) this directly puts more money into the population’s hands and they will spend more money -> increased AD. Hope these examples help.
topher Wrote: ------------------------------------------------------- > Example: The government decides it will build a > bridge for xyz city. It has to spend money to buy > the materials from businesses, which will create > income for the people working in those businesses. > The government is also going to have to hire > people to build the bridge, so it will create jobs > and thus increase income of these workers. All of > this increased income will allow people to spend > more money which increases the aggregate demand of > the country. > > Another example is transfer payments such as > welfare and social security. If the government > decides it will increase social security and > welfare benefits (increased government spending) > this directly puts more money into the > population’s hands and they will spend more money > -> increased AD. > > Hope these examples help. Before all this ancillary income stuff above, the genesis of the increase in demand would start when uncle Sam began bidding on materials, before he purchased a single ton. His willingess and mean$ to consume by default will increase Ag Demand. Think of it this way, if demand for steel was 100m tons per year w/out any demand from uncle sam, and the government is deciding to become a new consumer of steel, does the demand for steel increase or decrease? If the demand for steel increases does the total demand for goods and services nationwide increase or decrease? The result of G on income is true but, ancillary. C+I+G…etc. is correct too but nobody talks about economics in terms of C+I+G…
Gouman Wrote: ------------------------------------------------------- > The result of G on income is true but, ancillary. > C+I+G…etc. is correct too but nobody talks > about economics in terms of C+I+G… From my experience, when people talk about economics exclusively in terms of C+I+G+NX, there is usually something that they’re not considering. The effect of G on aggregate demand is something you can only really measure in the short term, and the net change in aggregate demand is immeasurable, IMO. If money is printed in order to finance G so that taxes don’t go up, it’s conceivable that Y will increase in the short term exactly as much as G increases. But regardless of whether direct taxes or an inflation of the money supply is used to finance G, there is going to be some “crowding out” as a result of the actual thing that is happening here: the government is transferring wealth created by market-induced economic transactions for non-market-induced transactions and incurring some cost on society both through bureaucracy and deadweight loss. So ultimately Y will decrease back to the full employment level (something that is at least partially dependent on external factors like the tax rate, level of regulation, technology, etc.) and prices across the board will generally rise in the short term and fall back down in the long term as AD and SAS correct themselves (if the money supply is assumed to be held constant). However, since the money supply is never constant in a fiat system, especially in the U.S. fiat system, we might as well just assume government spending is going to be financed through debt or currency inflation, which tends to pull prices upward. If you think about it, this makes a lot of sense. An increase in the amount of currency in the system has no real long-term effect on the amount of wealth, except (IMO) that it decreases it on the whole. But…I mean…at the end of the day, if they ask you what plus G does, it pushes up AD…just don’t think about these things on the long-term. It’s not really practical.