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How does an increase in government expenditure affect Real GDP in the short-run?

Government Expenditure is an injection into the circular flow of income and can be represented in an Aggregate Demand/Aggregate Supply Diagram as an increase in aggregate demand. (Shows on diagram shift in aggregate demand). This increase, can simultaneously be shown by looking at the components of the aggregate demand equation, AD = C + I + G + X – M. Hence, an increase in government expenditure ‘G’ will increase the Aggregate Demand.The effect of this can then easily be seen on the diagram. There will be an increase in Real GDP, which will consequently come with an increase in the average price level (also known as inflation).



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