Y=10,000G=1,250T= 3,000C= 2,000Suppose that G rises to 2,000, Which of the following options has changed.
Question
Suppose that Y=10,000, G=1,250, T=3,000, C=2,000 and G rises to 2,000. Which of the following options has changed?
Solution
In this case, if government spending (G) rises from 1,250 to 2,000, it will affect the following:
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Aggregate Demand: Aggregate demand is the total demand for all goods and services in an economy. It is calculated as the sum of consumption (C), investment (I), government spending (G), and net exports (NX). If G increases, aggregate demand will also increase, all else being equal.
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Budget Deficit or Surplus: The budget balance is calculated as total government revenue (mainly from taxes, T) minus total government spending (G). If G increases and T remains the same, the budget deficit will increase (or the budget surplus will decrease).
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Potential GDP: If the increase in G leads to an increase in productive government spending (for example, on infrastructure or education), it could potentially increase the economy's productive capacity and thus increase potential GDP.
Please note that without additional information (such as the reaction of monetary policy, the state of the economy, etc.), it's hard to say definitively what will change. But the above are some possible effects.
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