government spending

Examples of government spending in the following topics:

• How Fiscal Policy Relates to the AD-AS Model

  • When setting fiscal policy, the government can take an active role in changing its spending or the level of taxation.
  • In pursuing expansionary policy, the government increases spending, reduces taxes, or does a combination of the two.
  • Since government spending is one of the components of aggregate demand, an increase in government spending will shift the demand curve to the right.
  • If government spending exceeds tax revenues, expansionary policy will lead to a budget deficit.
  • If tax revenues exceed government spending, this type of policy will lead to a budget surplus.

• Defining Fiscal Policy

  • Fiscal policy is the use of government spending and taxation to influence the economy.
  • Fiscal policy is the use of government spending and taxation to influence the economy.
  • In this instance, government spending is fully funded by tax revenue, which has a neutral effect on the level of economic activity.
  • In this instance, the government spends more money than it collects in taxes.
  • In this case, government spending is lower than tax revenue.

• Fiscal Levers: Spending and Taxation

  • Tax cuts have a smaller affect on aggregate demand than increased government spending.
  • Spending and taxation are the two levers available to the government for setting fiscal policy.
  • The government spending multiplier is a number that indicates how much change in aggregate demand would result from a given change in spending.
  • The government spending multiplier effect is evident when an incremental increase in spending leads to an rise in income and consumption.
  • The government spending multiplier is always positive.

• Arguments For and Against Fighting Recession with Expansionary Fiscal Policy

  • Governments can increase their revenue by increasing taxes, or increase their expenditure by spending money on programs.
  • When taxes exceed government spending, the government is characterized as having a surplus.
  • When the government spends more than the revenue it collects, it has a deficit.
  • Increasing government spending, creating a budget deficit, and financing the shortfall through debt issuance are typical policy actions in an expansionary fiscal policy scenario.
  • The discord mostly centers on crowding out, defined as government borrowing leading to higher interest rates that in turn may offset the stimulative impact of government spending.

• Expansionary Versus Contractionary Fiscal Policy

  • This means deficit spending and decreased taxes when an economy suffers from a recession and decreased government spending and higher taxes during boom times .
  • In instances of recession, government spending does not have to make up for the entire output gap.
  • There is a multiplier effect that boosts the impact of government spending.
  • Crowding out occurs when government spending simply replaces private sector output instead of adding additional output to the economy.
  • Crowding out also occurs when government spending raises interest rates, which limits investment.

• The Multiplier Effect

  • In economics, the fiscal multiplier is the ratio of change in the national income in relation to the change in government spending that causes it (not to be confused with the monetary multiplier).
  • National income can change as a direct result in a change in spending whether it is private investment spending, consumer spending, government spending, or foreign export spending.
  • The government invests money in order to create more jobs, which in turn will generate more spending to stimulate the economy.
  • This suggests that types of government spending can crowd out private investment or consumer spending that would have taken place without the government spending.
  • During recessions, the government can use the multiplier effect in order to stimulate the economy.

• How Fiscal Policy Can Impact GDP

  • The fiscal multiplier (which is not to be confused with the monetary multiplier) is the ratio of a change in national income to the change in government spending that causes it.
  • The multiplier effect arises when an initial incremental amount of government spending leads to increased income and consumption, increasing income further, and hence further increasing consumption, and so on, resulting in an overall increase in national income that is greater than the initial incremental amount of spending.
  • The multiplier effect has been used as an argument for the efficacy of government spending or taxation relief to stimulate aggregate demand.
  • For example, suppose the government spends $1 million to build a plant .
  • In certain cases multiplier values of less than one have been empirically measured, suggesting that certain types of government spending crowd out private investment or consumer spending that would have otherwise taken place.

• Automatic Stabilizers

  • In macroeconomics, the concept of automatic stabilizers describes how modern government budget policies, particularly income taxes and welfare spending, act to dampen fluctuations in real GDP.
  • As a result more people file for unemployment and other welfare measures, which increases government spending and aggregate demand.
  • Also, because fewer individuals need social services support during a boom, government spending also decreases.
  • As spending decreases, aggregate demand decreases.
  • The fiscal multiplier is the ratio of a change in national income to the change in government spending that causes it.

• Problems of Long-Run Government Debt

  • Government debt limits future government actions and can be hard to pay off because Congressmen are unwilling to do what is necessary to pay down the debt.
  • Deficit spending during times of recession widely seen as a beneficial policy that can mitigate the effects of an economic downturn.
  • However, even Keynesians that support deficit spending during recessions advise that governments balance this deficit spending with surpluses during the eventual economic boom.
  • Since Congress is responsible for making budgetary, spending and taxation decisions, and because these elected officials may be disinclined to do anything that would hurt their chances to be re-elected, taking the necessary steps to balance out the periods of deficit spending during economic boom is difficult.
  • The problem with debt is that it needs to be paid off with future revenues, which curtails future government spending.

• Fiscal Policy and the Multiplier

  • For example, if a $100 increase in government spending causes the GDP to increase by $150, then the spending multiplier is 1.5.
  • For example, the government hands out $50 billion in the form of tax cuts.
  • There is no direct effect on aggregate demand by government purchases of goods and services.
  • But how much will they spend?
  • The initial rise in consumer spending will lead to a series of subsequent rounds in which the real GDP, disposable income, and consumer spending rise further.