2.2.4 Government expenditure

• Define trade cycle


  It refers to the fluctuations in economic activity that an economy experiences over a period, typically measured by changes in GDP and other economic indicators
• Phases of the trade cycle (1)

  Expansion: Rising economic activity, employment, and income levels. Governments might reduce spending due to increased tax revenues and lower unemployment benefits.

  
  

  Peak: Economic activity is at its highest. Government expenditure may stabilize as revenues peak.
• Phases of the trade cycle (2)

  Contraction: Decreasing economic activity, falling employment, and income levels. Government spending often increases to stimulate the economy through programs like unemployment benefits and public works.

  
  

  Trough: Economic activity is at its lowest. Government spending is typically high to counteract the recession.
• Define fiscal policy

  Fiscal policy involves government decisions about spending and taxation to influence the economy
• Components of fiscal policy

  Government Spending: Includes expenditure on goods and services, infrastructure, education, and defence.

  
  

  Taxation: Adjusting tax rates to control economic activity. Lower taxes can stimulate growth, while higher taxes can cool an overheated economy.
• Types of fiscal policies

  Expansionary Fiscal Policy: Used during recessions to boost economic activity through increased spending and tax cuts

  
  

  Contractionary Fiscal Policy: Used during booms to cool down the economy by reducing spending and increasing taxes
• Other influences on Gov spending (1)

  Political Factors: Government priorities, party policies, and political stability can significantly impact spending decisions

  
  

  Social Needs: Demographic changes, such as aging populations, can increase expenditure on healthcare and pensions
• Other influences on Gov spending (2)

  Economic Conditions: Inflation rates, unemployment levels, and economic growth can affect government spending

  
  

  Debt Levels: High public debt can constrain government expenditure due to the need for debt servicing

  
  

  External Factors: International events, trade relations, and global economic conditions
• Key economists for gov spending

  John Maynard Keynes: Advocated for increased government expenditure and lower taxes during recessions to stimulate demand (Keynesian Economics).

  
  

  Friedman: Criticized Keynesian policies, emphasizing the role of monetary policy over fiscal policy in managing economic cycles (Monetarism).
• Define monetary policy

  Central bank actions involving the money supply and interest rates to influence the economy
• Define expansionary + contractionary policies

  Expansionary Fiscal Policy: Policies designed to stimulate economic activity, typically through increased spending and tax cuts.

  
  

  Contractionary Fiscal Policy: Policies aimed at reducing economic activity, often through decreased spending and higher taxes.