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August 14, 2020 

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OMO: The abbreviation for open market operations, which is the Federal Reserve System's buying and selling of government securities in an effort to alter bank reserves and subsequently the nation's money supply. These actions, under the direction of the Federal Open Market Committee, are the Fed's number one, most effective, most often used tool of monetary policy. If, for example, the Fed wants to increase the money supply (termed easy money) it buy's government securities. If the Fed chooses to reduce the money supply (called tight money) it sells some government securities.

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GOVERNMENT PURCHASES LINE:

A graphical depiction of the relation between government purchases by the government sector and the economy's aggregate level of income or production. This relation plays a key role in the study of Keynesian economics. A government purchases line is characterized by vertical intercept, which indicates autonomous government purchases, and slope, which is the marginal propensity for government purchases and indicates induced government purchases. The aggregate expenditures line used in Keynesian economics is derived by adding or stacking the government purchases line onto the consumption line, as well as investment expenditures and net exports.
The government purchases line shows the relation between government purchases by the government sector and aggregate income or production. The income and production measures most commonly used are national income and gross domestic product. The purpose of the government purchases line is to graphically illustrate the government purchases-income relation for the government sector, which is then integrated into the aggregate expenditures line used in Keynesian economics.

The government purchases line is commonly presented in one of two forms reflecting autonomous government purchases and induced government purchases. The simplest is a horizontal government purchases line, one with a zero slope, that illustrates autonomous government purchases. With a horizontal line, government purchases are constant for all levels of aggregate income or production, hence autonomous and unaffected by income. A more realistic government purchases line is positively sloped, indicating a degree of induced government purchases. In this case, the vertical intercept, or Y-intercept, of the government purchases line marks autonomous government purchases and the slope represents induced government purchases. Of no small importance, the slope of the government purchases line is also the marginal propensity for government purchases (MPG).

Government Purchases Line
Government Purchases Line

The horizontal red line, labeled G in the exhibit to the right, indicates government purchases that are completely autonomous. There are no induced government purchases indicated by this line. The slope of the government purchases line is zero (MPG = 0). The intercept of this horizontal line indicates autonomous government purchases, which is $2 trillion in this case.

An alternative government purchases line, one with induced government purchases, can be illustrated in the exhibit with a simple click of the [An Induced Line] button. The new red line, labeled G' in the exhibit, is positively sloped, indicating that a change in the level of income or production induces a change in government purchases.

This new government purchases line actually indicates both induced government purchases and autonomous government purchases. The slope is induced government purchases and the intercept is autonomous government purchases.

  • Slope: The slope of this new government purchases line is positive, but less than one. In this case the slope is equal to 0.05, a $1 change in aggregate income or production induces a $0.05 change in government purchases. This positive slope indicates induced government purchases. Moreover, the slope of the line is also the marginal propensity for government purchases (MPG).

  • Intercept: This new government purchases line, like the original line, intersects the vertical axis at a positive value of $2 trillion. And once again this indicates autonomous government purchases.

<= GOVERNMENT PURCHASES DETERMINANTSGOVERNMENT SECTOR =>


Recommended Citation:

GOVERNMENT PURCHASES LINE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2020. [Accessed: August 14, 2020].


Check Out These Related Terms...

     | induced government purchases | autonomous government purchases | marginal propensity for government purchases | slope, government purchases line | intercept, government purchases line | consumption line | saving line | government purchases line | net exports line |


Or For A Little Background...

     | government purchases | government expenditures | Keynesian economics | macroeconomics | government sector | national income | gross domestic product |


And For Further Study...

     | induced expenditures | autonomous expenditures | aggregate expenditures | aggregate expenditures line | derivation, consumption line | government purchases determinants | Keynesian model | Keynesian equilibrium | injections-leakages model | aggregate demand | paradox of thrift | fiscal policy | multiplier | government functions |


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