Government Purchases

Until now, we have assumed that there are neither government nor taxes in our model of the economic system. But we have to get rid of that simplifying assumption, since one of the major purposes of the Keynesian approach is to diagnose the short-run impact of government spending on the economy. To take government spending into account, we will need a slightly more complex model. Replace the equilibrium equation

Y = C+I

with

Y = C+I+G

Remember, G is government purchases of goods and services. We will treat it as a component of autonomous spending. This more general equation expresses the same basic condition: income is the sum of the components of expenditure.

Equilibrium with Government Purchases