CBSE Class 12-commerce Answered

Effect of increase in government spending and the taxes remain constant. When government purchases, G, exceeds taxes, T, the government runs a deficit budget. G is a component of aggregate spending which increases the planned aggregate expenditure. At the given level of output, demand exceeds supply and firms expand their production. The aggregate demand schedule shifts up to AD.As the government expenditure increases from G₀ to G_1, it causes an equilibrium income to increase from Y₀ to Y₁. Now, the new equilibrium point is at E₁.