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).

AF
Answered by Antonio F. Economics tutor

3802 Views

See similar Economics IB tutors

Related Economics IB answers

All answers ▸

How many diagrams do I have to draw in an answer, and how do I use them in my answer?


What is a monopoly?


What are minimum prices and what are the effects of minimum prices?


Using diagrams and an example, define what is meant by the term "negative externality of consumption". List two policies that can be used to correct for this market failure.


We're here to help

contact us iconContact ustelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

MyTutor is part of the IXL family of brands:

© 2026 by IXL Learning