An increase in government purchases At Y1, E=C+I+G2 there is now an unplanned drop E=C+I+Gr in inventory △G so firms increase output and income rises toward a new equilibrium E1=Y1 △ E2=y2 CHAPTER 10 Aggregate Demand I slide 8CHAPTER 10 Aggregate Demand I slide 8 An increase in government purchases Y E E =C +I +G1 E1 = Y1 E =C +I +G2 E2 = Y2 Y At Y1 , there is now an unplanned drop in inventory… …so firms increase output, and income rises toward a new equilibrium G