Why might an increase in government expenditure give rise to
Added on - Sep 2019
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Why might an increase in government expenditure give rise to inflation?The increase in the government expenditure can give rise to the inflation in some form. Thegovernment has the ability to capture the resources that are in scarce and deploy in the areawhere it lacks (Barro, 1987). This also does not require the government to act in consideration ofthe market.The increase in the inflation generally takes place when the competition in the market concerningresources increases. If the commodities are considered then it can be stated that whenever theparticular commodity goes scarce, the prices of these go up and the consumers end up payingmore.The government expenditure can impact the inflation. The inflation can only takes place throughgovernment expenditure when there is shortage in the resources that are being dealt with. Thiswas what one can understand the aspect from the demand side.If the supply side can be taken into consideration then it can be stated that when the supply of themoney within an economy rises, then it is becomes a necessary condition where the prices of thegoods will rise. The reason behind is the increased accessibility to money supply and noincrement in the real value.The inflation occurs when the prices of the products and services rise up gradually. A constantand limited rise in inflation is considered to be as good for the economy.If the government has increased the spending then it will impact the way labor and goodsdemand in the economy is operating. One might witness the wage inflation in the economy alongwith the price inflation.
Moreover, it can be stated that the increase in the government spending can lead to the priceinflation to some extent. However, the major reason behind the government spending is not theinflation but the focus on growing the economy. The purpose to improve the economy might gowrong if the government increases the money supply in the economy frequently then required.The similar situation can arise if the private sector spending takes place. However, in these casesone aspect can be brought to the consideration that the spending does not have the direct impacton the supply of the money and, therefore, the impact on the inflation directly from theexpenditure is not identified majorly (Gali et al, 2007).If the spending is too generous only then it can be easily witnessed impacting the inflation. If theexample of the US government spending is considered, then it can be observed that it hasrequired constant induction from the government to keep the economic cycle running.The justification of this situation can be that if the government makes the purchases (that is whenit spends), then the cost of production goes up. This increase in the cost of production might pushthe product prices which eventually are stated as the inflation.The lower cost of borrowing is associated with the situation stated above and which mightimpact the interest rates in their real terms. Moreover, the situation can be good when theincrease in the consumption due to the increased induction results in more investment in variousgrowth aspects such as the infrastructures and production.The theoretical aspect has some resemblance to the real situations. However, due to the presenceof numerous variables in the environment, one can witness less fruitful results.