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PAPER ECONOMY: Markets, exchanges, and assorted economic activity that deal with legal or paper claims on physical assets rather than the physical assets. The vast majority of activities for the paper economy take place through financial markets. The paper (or financial) economy is based legal claims on these physical goods and resources. The term paper economy is used because these legal claims historically have been pieces of paper--paper that you can't eat, wear, or live in to satisfy wants and needs. However, as technology progresses, much of the paper is giving way to electronic data storage.

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SLOPE, GOVERNMENT PURCHASES LINE:

The positive slope of the government purchases line is also termed the marginal propensity for government purchases (MPG). This slope is greater than zero but less than one, reflecting induced government purchases. The slope of the government purchases line affects the slope of the aggregate expenditures line and thus also affects the magnitude of the multiplier process.
Government Purchases Line
Government Purchases Line
The government purchases line shows the relation between government purchases by the government sector and the level of aggregate income or production. The income and production measures most commonly used are national income and gross domestic product.

A representative government purchases line is presented in the exhibit to the right. This red line, labeled G in the exhibit, is positively sloped, indicating that greater levels of income or production generate greater government purchases by the government sector. This positive relation indicates that the government sector, especially state and local governments, is inclined to use increasing tax revenue generated by an expanding economy for government purchases.

The government purchases line graphically illustrates the government purchases-income relation for the government sector, which plays a key role in the aggregate expenditures line used in Keynesian economics to identify equilibrium income and production.

The slope of the government purchases line presented here is positive, but less than one. In fact, the slope of the government purchases line is numerically equal to the marginal propensity for government purchases. In this case the slope is equal to 0.05. The positive slope reflects induced government purchases--more income means more government purchases. Click the [Slope] button to illustrate.

To illustrate the equality between slope and the marginal propensity for government purchases, consider the equations for each. The slope of the government purchases line is specified as the "rise" over the "run." The rise is the change in government purchases measured on the vertical axis and the run is the change in income measured on the horizontal axis.

slope=rise
run
=change in government purchases
change in income
The marginal propensity for government purchases (MPG) is the incremental change in government purchases resulting from an incremental change in income.
MPG=change in government purchases
change in income
The slope of the government purchases line is the marginal propensity for government purchases, they are one and the same.

The positive slope of the government purchases line reflects induced government purchases, which is government purchases that depend on the level of income. If the aggregate economy has more income, then the government sector is induced to undertake additional government purchases. Of course, a drop in aggregate income induces the government sector to reduce expenditures.

<= SLOPE, CONSUMPTION LINESLOPE, INVESTMENT LINE =>


Recommended Citation:

SLOPE, GOVERNMENT PURCHASES LINE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2019. [Accessed: September 20, 2019].


Check Out These Related Terms...

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


Or For A Little Background...

     | government purchases | government expenditures | government consumption expenditures and gross investment | Keynesian economics | macroeconomics | government sector | national income | gross domestic product | determinants |


And For Further Study...

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


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