March 17, 2018 

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ADJUSTMENT, SHORT-RUN AGGREGATE MARKET: Disequilibrium in the short-run aggregate market induces changes in the price level that restore equilibrium. If the price level is above the short-run equilibrium price level, economy-wide product market surpluses cause the price level to fall. If the price level is below the short-run equilibrium price level, economy-wide product market shortages cause the price level to rise. In both cases short-run equilibrium is restored. You might want to compare adjustment, long-run aggregate market. Price level changes induce changes in both aggregate expenditures and real production. Unlike the long-run aggregate market, changes in the price level can induce changes in short-run aggregate supply, making it greater or less than full-employment real production.

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Lesson 11: Circular Flow | Unit 3: Government Page: 12 of 22

Topic: Taxes <=PAGE BACK | PAGE NEXT=>

The government sector tends to be in the middle of most economic activity.
  • Taxes are collected by all levels of government, federal, state, and local.
  • The green flow from the household sector to the government sector is taxes.
  • This flow is household income diverted to the government sector.
Three basic uses of national income:
  • Consumption: Income used by the household sector to buy GDP.
  • Saving: Income diverted to the financial markets for business sector borrowing for capital purchases.
  • Taxes: Income diverted to the government sector for government purchases.
All three come from national income.

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The change in government purchases induced by a change in income or production (national income or gross domestic product). The marginal propensity for government purchases (abbreviated MPG) is another term for the slope of the government purchases line and is calculated as the change in government purchases divided by the change in income or production. The MPG plays a role in Keynesian economics. It augments the slope of the aggregate expenditures line and is part of the multiplier process. A related marginal measure is the marginal propensity to consume.

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