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Impact of Government Expenditure on Aggregate Demand
Added on -2019-09-21
This article discusses the impact of government expenditure on aggregate demand and how it affects the economy. It also explains the expansionary fiscal policy to eliminate a recessionary gap. Additionally, it compares the Keynesian and Classical schools of thought and provides an opinion on lobbying efforts.
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1. Which has a larger effect on aggregate demand: an increase in government expenditure or an equal-sized decrease in taxes? Explain your answer.The aggregate demand gets impacted greater through the increment in the government expenditure. Aggregate demand refers to the final demand that incurs within the country regarding products and services for a particular time frame (Friedman & Heller, 1969). It also refers to the overall products and services that are purchased within an economy at various price points. The aggregate refers to the effective demand and is denoted by the below given formula:Y = C + Ip + G + (X - M)The investments made by the government and the consumption expenditures (G), can be calculated using “G-T” which refers as the difference among the expenditures made by the government and the collected tax (Persson & Tabellini, 1994). If the expenses of the governmentincreases or there is any kind of reductions in tax, then the increment in the Gross Domestic Product can be evident reasoning that the expenditures of the government is the major part of theoverall or aggregate demand in an economy.As per the Keynesian theory, if the employment is increased by the government using the public activities and considers the increment in the interest rates, then the investments in other areas canbe compromised (Shaw, 1972). It should not be pointed towards crowding out. There is a belief among Keynesian theorists that in adverse situations, the increased expenses by the government increases the overall output (which comes as larger than original increased spending)
2. To eliminate a recessionary gap, which fiscal policy should the government pursue? Be specific.The consideration of expansionary fiscal policy is the suggested mode for the elimination of recessionary gaps. The expansionary policies have been largely preferred by the governments whenever the economies have faced recessions. The focus in this policy has been on increasing the expenditures of the government along with reducing the taxes (Persson & Tabellini, 1994). The recessionary gap can be identified as the outcome of recession. This can be of the consideration that the overall or aggregate demand (GDP) is below than where it could have been in case there was complete employment. The consideration to reduce the gap will lead to the government towards increasing the expenditure which has direct impact on the overall or aggregate demand curve. The reason is that the expenditures of the government are likely to increase the demand for the goods and services. Moreover, the consideration of reduction in the taxes is generally expected to positively impact the demand curve through increased productivityof the consumers (Persson & Tabellini, 1994).The expansionary policy impacts the demand curve and shifts it to the right. This eventually impacts the recessionary gap in a negative manner and closes the gap which in turn aid in growing and developing the economy.3. The online text discusses fiscal policy in action. Keynesian economics is a school of thought that believes fiscal policy is needed to stabilize the fluctuations in the real GDP. Classical economists such as Adam Smith believe that the economy is most efficient withoutgovernment intervention. Suppose you are an advisor to a presidential candidate. Which
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