2.2.4 Government expenditure (G)

What is the trade/business cycle?

The trade cycle, or business cycle, refers to the fluctuations in economic activity that an economy experiences over time, typically measured by changes in GDP and other economic indicators.

What happens to government expenditure during the expansion phase of the trade cycle?

During expansion, economic activity, employment, and income levels rise. Governments may reduce spending due to increased tax revenues and lower unemployment benefits.

How do transfer payments differ from government expenditure?

Transfer payments are payments like benefits and pensions that do not correspond to current goods/services, so they are excluded from government expenditure in AD.

How does the trade cycle affect government expenditure?

During recessions, unemployment rises, increasing government spending on benefits; during booms, unemployment falls, reducing these expenditures.

How does government expenditure vary between national and local levels?

Government expenditure can occur at both levels, depending on the responsibilities of each government tier.

What happens to government expenditure during the peak phase of the trade cycle?

At the peak, economic activity is at its highest. Government expenditure may stabilize as tax revenues peak.

What happens to government expenditure during the contraction phase of the trade cycle?

During contraction, economic activity, employment, and income levels fall. Government spending often increases to stimulate the economy through programs like unemployment benefits and public works.

What happens to government expenditure during the trough phase of the trade cycle?

At the trough, economic activity is at its lowest. Government spending is typically high to counteract the effects of the recession.

What is fiscal policy?

Fiscal policy involves government decisions about spending and taxation to influence the economy.

What are the two components of fiscal policy?

Government spending and taxation.

Give an example of fiscal policy through government spending.

The U.S. government increased spending on infrastructure projects during economic downturns.

How does taxation function as a fiscal policy tool?

Adjusting tax rates helps control economic activity; lower taxes can stimulate growth, while higher taxes can cool an overheated economy.

Give an example of a tax-related fiscal policy decision.

The 2017 Tax Cuts and Jobs Act in the U.S. aimed to stimulate economic growth.

What is expansionary fiscal policy?

Expansionary fiscal policy is used during recessions to boost economic activity through increased spending and tax cuts.

Give an example of expansionary fiscal policy.

The American Recovery and Reinvestment Act of 2009.

What is contractionary fiscal policy?

Contractionary fiscal policy is used during economic booms to cool down the economy by reducing spending and increasing taxes.

Give an example of contractionary fiscal policy.

Budget surpluses and reduced public spending in the late 1990s in the U.S.

How do political factors affect government expenditure?

Government priorities, party policies, and political stability can significantly impact spending decisions.

How do social needs influence government spending?

Demographic changes, such as aging populations, can increase expenditure on healthcare and pensions.

Give an example of social needs affecting government expenditure.

Japan’s rising healthcare costs due to its aging population.

How do economic conditions affect government spending?

Inflation rates, unemployment levels, and economic growth all influence how much a government chooses to spend.

Give an example of economic conditions leading to increased spending.

Increased unemployment benefits during high unemployment periods.

How do debt levels influence government expenditure?

High public debt can constrain spending due to the need for debt servicing.

Give an example of debt levels affecting spending.

Greece’s austerity measures after the 2008 financial crisis.

How do external factors influence government expenditure?

International events, trade relations, and global economic conditions can all affect government spending decisions.

Give an example of external factors impacting government spending.

Increased defense spending during geopolitical tensions.

What did John Maynard Keynes advocate regarding government expenditure?

Keynes advocated for increased government spending and lower taxes during recessions to stimulate demand.

What was Milton Friedman’s criticism of Keynesian policy?

Milton Friedman criticized Keynesian policies, emphasizing the role of monetary policy over fiscal policy in managing economic cycles.

What is the trade cycle?

The trade cycle refers to fluctuations in economic activity over time, marked by phases of expansion and contraction.

What is expansionary fiscal policy?

Expansionary fiscal policy consists of measures designed to stimulate economic activity, typically through increased spending and tax cuts.

What is contractionary fiscal policy?

Contractionary fiscal policy consists of measures aimed at reducing economic activity, often through decreased spending and higher taxes.

What is public debt?

Public debt is the total amount of money that a government owes to its creditors.

What is monetary policy?

Monetary policy refers to central bank actions involving the money supply and interest rates to influence the economy.