Examining the Economic Effects of Increased Government Purchases

This question asks us to sequence the effects of an increase in government purchases ($G$) while keeping the tax rate ($T$) constant. Let's analyze each statement in the context of macroeconomic principles.

Statement (B): Government Runs a Deficit When G Exceeds T

This statement defines a government budget deficit. A deficit occurs when the government's spending ($G$) is greater than its tax revenue ($T$). When government purchases ($G$) increase and taxes ($T$) remain unchanged, the difference $G - T$ increases. This means the government is spending more relative to its income, potentially leading to or widening a budget deficit.

Statement (A): Rise in Planned Aggregate Expenditure

Planned Aggregate Expenditure (AE) is the total amount that households, firms, and the government plan to spend on goods and services. It is typically represented as $AE = C + I + G + NX$, where $C$ is consumption, $I$ is investment, $G$ is government purchases, and $NX$ is net exports. Since government purchases ($G$) are a direct component of AE, an increase in $G$ directly leads to a rise in planned aggregate expenditure.

Statement (D): Aggregate Demand Schedule Shifts Upward

Aggregate Demand (AD) represents the total demand for goods and services in an economy at different price levels. An increase in planned aggregate expenditure, driven by higher government purchases ($G$), means that more goods and services are demanded at every possible price level. This causes the aggregate demand schedule (or curve) to shift upwards or to the right.

Statement (C): Equilibrium Income Level Increased

The aggregate demand schedule determines the equilibrium level of income and output in the economy. When the AD schedule shifts upward due to increased government purchases, the economy moves to a new equilibrium where both the price level and the level of national income and output are higher. This increase in income is often magnified by the multiplier effect.

Sequencing the Economic Impacts

Considering the causal flow and the nature of the statements:

• The condition of a government deficit (B) is a fiscal reality related to the change in G and T.
• The increase in government purchases ($G$) directly boosts planned aggregate expenditure (A).
• This rise in aggregate expenditure leads to an upward shift in the aggregate demand schedule (D).
• Finally, the shift in aggregate demand results in a higher equilibrium income level (C).

Therefore, the logical sequence reflecting these economic impacts is (B), (A), (D), (C).