1. The policy of the government related to taxation and govt, expenditure is known as fiscal policy.
2. OY is the equilibrium level of output. The effects of an increased govt, expenditure is shown in the diagram below.
Govt, expenditure is one of the components of AD. AD = C + I + G + (x – m) So the AD curve shifts upward when there is an increase in the govt, expenditure. As a result the equilibrium changes from e to e . The level of output increases from y to y .
It can be seen from the diagram that the increase in govt, expenditure is from A to A1 But the output increased from y to y1 This is because of multiplier effect. The effect of an increased tax on the level of output is given in the diagram below.