goverment income- expenditure model

• Government expenditure G - affects the position of the AD schedule
• Direct taxes T - affects the slope of the consumption function and hence slope of AD schedule
• Keynes analysis suggests that the government could influence aggregate output in the economy this raises the equilibrium level of national income, however ignores some important issues prices, interest rates and the need to fund government expenditure
• Balanced budget multiplier- states that an increase in government spending plus an equal increase in taxes leads to higher equilibrium output