Government spending and AD

• What is a key component of the aggregate demand equation for Cyprus?

  Government spending
• How does government spending influence economic activity?

  It influences both short-run and long-run growth
• What effect does government spending have on aggregate demand?

  It can shift aggregate demand to the right or left
• What is current spending in government spending?

  Spending on the maintenance of key public sector services
• What does current spending include besides maintenance of services?

  Payment of public sector wages
• What is capital spending in government spending?

  Spending on infrastructure projects
• What are examples of capital spending?

  Building new hospitals, schools, and roads
• What is welfare spending in the UK?

  Spending on benefits and pensions
• Why is welfare spending significant in developed countries?

  It is often the largest part of government spending
• What are debt interest payments in government spending?

  Payments made on the interest of government debt
• Why are debt interest payments significant for governments?

  They represent a large financial obligation that can spiral out of control
• How do current, capital, and welfare spending affect the economy?

  They act as injections into the circular flow of the economy
• How do debt interest payments differ from other types of government spending?

  Debt interest payments do not act as an injection into the economy
• What is the opportunity cost of debt interest payments in the UK?

  Approximately £50 billion per year
• How does the cost of debt interest payments compare to state schooling and the NHS in the UK?

  Debt interest payments are less than state schooling and NHS costs
• What is a budget deficit?

  When government spending is greater than taxation revenues in a fiscal year
• What does a budget surplus indicate?

  Government spending is less than taxation revenues
• What is the national debt?

  The total stock of debt over time
• How does national debt differ from a budget deficit?

  National debt is the accumulation of budget deficits over time
• How do budget deficits and surpluses affect national debt?

  Budget deficits increase national debt, while surpluses decrease it
• What happens to the national debt after a year of budget surplus?

  The national debt will decrease
• What are the key differences between budget deficit and national debt?

  • Budget deficit: Government spending exceeds taxation revenues in one fiscal year.
  • National debt: Total stock of debt accumulated over time.
• What are the implications of running a budget deficit for a government?

  • Requires borrowing to cover the difference.
  • Can lead to an increase in national debt over time.
• What are the implications of running a budget surplus for a government?

  • Reduces national debt.
  • Indicates a healthy fiscal position.
• What is the significance of understanding government spending in economics?

  • Influences aggregate demand.
  • Affects economic growth and stability.
  • Impacts public services and welfare.