Simple income determination merely consist two types of expenditure. One is consumption expenditure (C) to generate consumer goods. Second is the investment expenditure (I) to generate capital goods. The third component is the public expenditure (G) prepared by government. It is made up to generate public goods such as public health, literacy, child nutrition, social welfare and much more for the collective welfare of the society.
The traditional economists held the view which government was unproductive. Keynes discarded their idea and argued that government actions (i.e., taxing and spending) strongly persuade the level of economy. Taxation and public spending can be employed to attain macro goals such as growth and economic stability. Such practice is termed as fiscal policy.
Keynes verified that fiscal policy is more efficient in improving economies from depression. Public expenses can be employed to raise efficient demand during depression. The injection of money in the economy will produce demand and this will raise investment and employment. Therefore public expenditure will put back the economy again on its expansion path.
A lot of countries have accepted his policy suggestions and improved from the Great Depression of the year 1930s. As then the role of government and fiscal policy became significant in macroeconomic management.
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