While the government purchases line is commonly assumed to be horizontal, reflecting autonomous government purchases, it realistically has a positive slope, indicating induced government purchases. Induced government purchases means that government purchases are based on the aggregate level of income or production in the economy. Government purchases are induced because governments, especially state and local governments use tax collections to finance their expenditures and purchases. A growing, expending economy invariably generates more tax revenue, which state and local governments are obliged to spend. A fall off in the economy, then restricts tax revenue and forces a reduction in government purchases.

However, a number of other factors also affect government purchases independent of income. For example, a typical government entity like the Shady Valley city commission, might decide to increase its government purchases by building a new elementary school. This extra spending is NOT the result of an expanding economy. A windfall of tax revenues did flood into the city's bank account.

Rather, this expenditure was undertaken for "other reasons" unrelated to income or production. The specific reason underlying Shady Valley's increase in spending was to replace an old elementary school that was destroyed by a flood of the adjacent Shady Valley River, after it was flattened by a massive tornado, which arose on the heals of a major earthquake centered directly under the school.

In addition, a majority of the city commissioners, being proponents of improved public education, decided this was a prime opportunity to build a new, state-of-the art, technology-enhanced school. The commissioners also felt that this spending would stimulate a slumping Shady Valley construction industry and boost the overall level of activity in the local economy.

What They Do

Determinants

The exhibit to the right presents the government purchases line, labeled G. Government purchases determinants can trigger either an increase or a decrease in government purchases.

• Increase in Government Purchases: An increase in government purchases is illustrated by an upward shift of the government purchases line. At each income and production level, the government sector undertakes greater government purchases. Click the [Increase] button to illustrate.


• Decrease in Government Purchases: A decrease in government purchases is illustrated by a downward shift of the government purchases line. At each income and production level, the government sector undertakes fewer government purchases. Click the [Decrease] button to illustrate.

What They Are

• Fiscal Policy: At the federal level, the desire to counter instability caused by other expenditures though fiscal policy is always a possibility. If aggregate expenditures decrease because of less spending from the household or business sectors, then the government sector is often inclined to spend more. Doing so increases government purchases and thus causes the government purchases line to shift upward. Alternatively, if aggregate expenditures have increased from extra consumption and investment to the point of triggering inflation, then the government is likely to decrease government purchases which thus causes the government purchases line to shift downward.


• Politics: Political considerations are always bubbling near the surface of government activity. Perhaps the political winds start to blow in the direction of reducing the federal deficit or limiting government funded social programs. Such a force could decrease government purchases and result in a downward shift of the government purchases line. Or perhaps a number of rather vocal and financially powerful interest groups convince political leaders to spend more on worthy activities, like the space program, national defense, or environmental quality. This shift in the political winds is bound to increase government purchases and lead to an upward shift of the aggregate expenditures line.