What is a Macroeconomic consequence of an increase government spending?
Increases in Government Expenditure will result in an increase in National Output (Y). This is due to government expenditure (G) being one of the variables which make-up Aggregate demand (AD= C + I + G + NX). An increase in G will therefore result in an increase in AD (AD1 to AD2). As seen on a diagram, the positive shift in AD will cause Output to grow (Y1 to Y2). Showing, the initial injection of extra expenditure from the Government will result in economic growth. Output will also grow at a faster rate than the initial injection due to the multiplier effect. So as ones spending is another persons income, all this extra spending from the government will result in National Output growing at a larger scale the initial change in AD (Y2to Y3). Showing the initial injection of extra spending from the Government will result in larger output being produced in the economy. However, what can also be seen on this diagram (dependent on the productive capacity of economy) is that the extra spending from Government could result in demand-pull inflationary pressure in the economy. If it is close to full-capacity, there will be significant increases in prices, seen in the sifts from p1 to p3 on the diagram. Consequently it may result in a fall in real incomes for consumers, and lead to less disposable income for them to spend on goods and services. Overall, reducing consumption (C) in the long-run which may then reduce Aggregate demand in the economy and lead to lower level of output being produced in the Economy.
