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 ▸

Using the extract explain the effect of the corona virus on the UK economy in 2020 (10 marks)


How do I work out the different elasticites of demand?


Explain how government policies can reduce the natural rate of unemployment


What is market failure?