Since government expenditure increase is totally financed by tax increase, there will be an increase in income that equals expenditure increase considering the balanced budget multiplier concept.

The transactions which are completely financial are not included into GDP. This kind of financial transactions consist of transfer payments of public and private sectors, as well as buying/ selling transactions of securities.

If you remember, microeconomics analyses how a market for a single good operates and how individual decision makers(households and businesses) behave. Macroeconomics as a science primarily defines hundreds of concepts such as unemployment, inflation, economic stagnation, balance of payments and monetary policy among others.

Leakages are the factors that cause autonomous components of aggregate expenditures to reduce.

When the households decide to increase their savings without a change in income level, interesting contradiction called as saving paradox will arise. Planning to increase savings also means planning less consumption at the same time. As a result of the decrease in consumption, aggregate expenditure, i.e., aggregate demand, will decrease. In this case, the decrease in aggregate expenditures leads to an increase in stocks. This increase in stocks will lead to production level of firms and income level to decrease.

The primary automatic stabilizer is the income tax. Of the income taxes, automatic stabilizer characteristic is more clear and also significant in progressive income tax. Taxes collected over income are in the center of a tax system. When production (i.e., income) increases in an economy, total income tax revenue of the government increases as well and vice versa. In progressive income tax system, tax rate that a person has to pay increases with the income of that person obtains.

In mercantilism, the basic idea is the wealth of society. But according to the socialist view, all production factors must belong to the governments and as a rule, all economic activities performed by the government constitute the basis. In Keynes’ studies, it is argued that fiscal policy tools must be used efficiently to end a recession. Accordingly, issues such as unemployment and inflation may be affected by taxation and spending policies, and serious slowdowns in economic activities and depressions may be prevented. Keynesian view charges the government to direct the economic life by fiscal policy. But in present time, with the effect of developments such as accelerating globalization and financialization, government shortens some of its functions while enlarging the scope of some of its tasks.

Aggregate expenditures are higher than GDP in the income levels when AE function is above the 45° line. In this case, the GDP will change towards the equilibrium level and when the equilibrium point is reached, the change will end. Unexpected (unplanned) stock change values are negative in income levels below 1,000 TL in the figure. These negative values represent the decrease in stocks. Production will increase to replace this decline in stocks. Thus, GDP will change in the direction of increase.

Say’s Law states that each supply creates its own demand.

Even if the income level is zero, consumption expenditures are positive. This shows that there is a part of the consumption expenditures that is not related to income. This part of the consumption expenditure, which is independent of income, is called autonomous consumption.

Today, national income figures obtained as a result of national income accounting system of a country is the basic measurement tool. While the economic approach named mercantilism was used in 17th and 18th centuries, many people believed that the best way to measure the economic performance of a country was the precious metal stock that country had.

The situation in which an economy operates with insufficient expenditure level is called as having a deflationary gap. In order to reach the full employment output level, in other words, to close the deflationary gap by eliminating spending gap in the economy, it is required to shift aggregate expenditure function upward. For the government to shift aggregate expenditure function upward there are three ways: decrease taxes, increase public expenditures and make the investments to be more profitable. Arranging fiscal policy to increase aggregate expenditures is called as expansionary fiscal policy.

Aggregate supply refers to the amount of goods and services that are desired to be produced in the economy.

Leakages are used to denote reductions in autonomous components of aggregate expenditures. It is possible to mention three types of leakages from the income-expenditure flow: savings, taxes and imports for an open economy. In other words, leakages are the factors that cause autonomous components of aggregate expenditures to reduce.

The total of wage, interest, profit and rent earnings obtained as a result of joining the production activities is the total of revenues obtained. The total of revenues obtained by production factors in a country is called the national income.

Marginal propensity to import is the ratio of change in import to change in income.

When the economy reaches an equilibrium below its full employment level of GDP, the deflationary gap occurs.

Negative saving is the part of the expenditure that exceeds the income.

Aggregate demand represents the level of expenditure that economic units are planning to make at various income levels. Therefore, the determination of equilibrium income and expenditure level for an economy is the period of determining the level of income and expenditure, which is equal to what is planned and realized.