Y =
x [a(P)
+ b(Y -T) + Ig(P) + G +
Xn(P)].Fiscal Policy and Aggregate Demand
The aggregate demand curve
shows the relationship between the price level and the corresponding level of
GDP at which planned production equals planned purchases. If b represents
the marginal propensity to consume and a(P), Ig(P),
G, T, and Xn(P) represent autonomous
consumption, gross investment, government spending, total tax receipts, and
net exports, respectively, then the AD curve takes the form:
Y = x [a(P)
+ b(Y -T) + Ig(P) + G +
Xn(P)].
Holding the price level constant, it is apparent that a change in government expenditures of D G or taxes of D T will shift the AD curve according to the multipliers:
= ; 
= 
.
Then, the horizontal shift in the AD curve can be calculated as:
D YP
= Constant =
x D G + 
x D T.
As in the text example, suppose that b = .75, D G = -$2 billion and D T = $4 billion. The resulting shift in the AD curve is:
D YP
= Constant = 
x -2 + 
x 4 = (4
x -2) + (-3 x 4) = -$20 billion.