Suppose our focus is now upon quality of government measured by a proxy variable g, which is given by the ratio of productive government expenditure and population. It is observed, in general a rich country can afford to spend more on its citizen in form of government expenditure and a poor country is characterized by limited ability of its government in terms of spending on its citizens. This is the Income View. Likewise, higher the value of g is, the production sector of the economy is more productive through active involvement of the government in the sector or by means of productive government funding. This is the government view.
Draw a well labeled graph showing the interrelationship between y and g in terms of g(y) and y(g) curve in a y-g space. Indicate the point of equilibrium.Typically, a change in g has a slower impact on y than a change in y on g. Given this, which curve should be steeper?