... minus taxes and consumption, whereas public saving is equal to taxes minus government spending. Because income, government spending and taxes are fixed, so is the level of savings. The savings curve is therefore vertical. An increase in government purchases has the initial impact of increasing the demand for goods and services in the economy, because government purchases are one of the components of demand. However, because total output is fixed by the factors of production, the increase in government spending must be met by a fall in another category of demand. We know consumption cannot fall, because this is a function of disposable income, which is equal to income minus taxes. Because there is no change in taxes, there is no change in consumption. This leaves only investment as the factor which must fall. To see why investment falls, consider the following diagram. The additional government spending means that public saving falls, ...

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