15. General government purchase of goods and services

Expansion in public expenditure creates higher demand for private output, which leads to expansion in private sector production and employment in the short run. In the long run, there is no effect on private-sector employment.


The consumption equation stabilizes and returns the saving surplus of the private sector to the baseline. However, because of the absence of fiscal reaction function, the public saving deteriorates permanently. If the higher public consumption is financed by higher taxes, there will be no effect on public budget in the long run. In the following, two scenarios are presented: in the first case the public purchase is not financed and in the second case the additional public purchase is financed by higher income taxes.


hmtoggle_arrow1A. Increase in general government spending
hmtoggle_arrow1B. Increase in general government spending - balanced budget