If firms expect profit to rise, investment will increase. Factors that can effect business expectations are things like wars, technology changes, and changes in the tax structure. These are the third component of aggregate expenditure. Most government purchases are made by state and local governments, not the federal government. We have found that government purchases are autonomous to income.
Transfer payments have a positive effect on consumption.
Net taxes are not effected by the level of income in the economy. When income rises, Americans spend more. Some of this increase spending goes for imported goods. Higher incomes lead to more spending on imported items like French wine, foreign cars, and vacations abroad. Our exports are effected by the consumers in the other countries.