I know that governments can increase demand by increasing employment, transfer payments, and capital for the private sector.

Why does government spending increase by the ""same"" amount as demand?

Thank you.

  • 1
    $\begingroup$ I am not sure it all does: for example for transfer payments, the recipients may use part to save or to pay down existing debt, so reducing the amount of additional consumption to below the additional government spending. Similarly capital grants to the private sector may either replace some amounts that might otherwise have been financed privately, or might stimulate additional private investment to an amount greater than the grant and the amount which would otherwise have happened $\endgroup$
    – Henry
    Commented Sep 10, 2022 at 17:21
  • $\begingroup$ Hi, thanks a lot for your answer! $\endgroup$
    – student
    Commented Sep 11, 2022 at 6:40

1 Answer 1


I try to answer, but I'm not sure of understanding your question. You'd better, when you post a question, be more specific, for instance writing the equations you are referring to.

I can suppose that you refer to the equation that defines aggregate demand, AD (in a closed economy):


where $C$ is consumption, $I$ is investment and $G$ is government expenditure.

So, $G$ is a component of the aggregate demand, besides $C$ and $I$. If $G$ increases, on the right side of the equation, $AD$, on the left side, increases by the same amount, by definition.

Be careful: transfer payments are not a component of aggregate demand, but in national accounts they are accounted as negative taxation.


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