Why does a $1 increase in government purchases lead to more than a $1 increase in income and spending?

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Business

Molly Little

26 November, 10:51

Why does a $1 increase in government purchases lead to more than a $1 increase in income and spending?

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Franco Meyer · Answer 1

If there is $1 increase in the government purchases, this will increase the income and spending by more than $1. This increase is due to the government spending multiplier.

The increase in government spending will lead to increase the aggregate demand and national income of a nation. Therefore, this will increase the induced spending.

That's why one dollar increase in government spending will lead to more than one dollar increase in income and spending.