2.2.4 Government expenditure (G)

What is government expenditure?

Spending by the government on goods and services such as healthcare, education and defence.

How does government expenditure affect aggregate demand (AD)?

An increase in government spending raises AD, while a decrease lowers AD.

What happens if government spending and taxes increase by the same amount?

There may be no overall change in AD because higher taxes reduce disposable income (consumption falls) while government spending rises.

What is the trade cycle?

Fluctuations in economic activity between periods of boom and recession.

How does the trade cycle affect government spending?

In a recession government spending increases to boost demand and reduce unemployment, while in a boom government may reduce spending to control inflation.

Why does government spending automatically rise in a recession?

Because of automatic stabilisers such as increased spending on unemployment benefits.

What is fiscal policy?

Government decisions about spending and taxation.

How does fiscal policy influence government expenditure?

The level of government spending depends on budget decisions and priorities set by the government in fiscal policy.

Why is some government spending fixed?

Spending on areas such as pensions, healthcare and education must be funded regardless of economic conditions.

How does the age distribution of the population affect government spending?

An ageing population increases spending on pensions and healthcare, while a younger population increases spending on education.

What is the dependency ratio and how does it affect government spending?

The dependency ratio is the proportion of dependents to the working population; a higher ratio leads to higher government spending.