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An Increase in Government Spending
(1)
Income
(Y)
(2)
Consumption
(C)
(3)
Intended
Investment
(II)
300
400
500
600
700
800
260
340
420
500
580
660
60
60
60
60
60
60
(4)
Original
Aggregate
Demand
(AD = C + II)
320
400
480
560
640
720
(5)
Government
Spending
(G)
(6)
New Aggregate
Demand
(AD1 = C + II + G)
80
80
80
80
80
80
400
480
560
640
720
800
Aggregate demand and output
Full
employment
E1
800
AD1 (G=80)
AD0 (G=0)
Full employment
equilibrium
400
E0
Unemployment
equilibrium
160
80
45°
0
400
800
Y*
Income (Y)
Federal Outlays
Federal Sources of Funds
Excise,
estate, and
other taxes
(6%)
Borrowing to cover
deficit (9%)
Community
development
(2%)
Science,
natural
resources
(6%)
Corporate
taxes (13%)
Social
insurance and
retirement
taxes (32%)
Personal
income taxes
(39%)
Health (9%)
Justice, government
administration (2%)
Interest
on debt
(8%)
Social
security,
Medicare
(32%)
Income security,
education, social
services (17%) National defense,
veterans, foreign
affairs (23%)
3
2
Percent of GDP
1
0
-1
-2
-3
-4
-5
-6
-7
1975
1980
1985
1990
1995
Year
2000
2005
2010
60
Percent of GDP
50
40
30
20
10
0
Year
Domestically-held debt
Foreign-held debt
30
Outlays
25
Percent of GDP
20
15
Receipts
10
5
Surplus (+) or deficit (-)
0
-5
-10
1975
1980
1985
1990
Year
1995
2000
2005
2010
Output (Y)
Production generates
income to
households
Income (Y)
leakages
taxes (T)
savings (S)
consumption (C)
Spending (AD)
imports (IM)
injections
intended investment (II)
government spending (G)
exports (X)
Aggregate demand and output
AD1 (decrease in t)
E1
AD0 (original t)
Slope = mpc(1 t)
E0
45°
Y0
Y1
Income (Y)