2.2.3 Government Expenditure

• Aggregate demand


  The total demand for goods and services in an economy over a specific period
• Government expenditure


  The total spending by the government on goods, services, and infrastructure projects
• Components of Aggregate Demand (AD)


  • Consumption (C)
  • Investment (I)
  • Government Expenditure (G)
  • Net Exports (X - M)
• AD = C + I + G + (X - M)
• Government expenditure (G)


  Directly contributes to aggregate demand (AD)
• Increase in government spending

  Leads to a rise in aggregate demand
• Decrease in government spending

  Results in a decline in aggregate demand
• Trade cycle


  The recurrent fluctuations in economic activity that occur over time, consisting of boom, recession, slump, and recovery phases
• During a recession or slump


  Aggregate demand is low, leading to reduced economic activity, increased unemployment, and lower consumer spending
• How government can combat economic downturns


  Increase expenditure on public projects, infrastructure, and social welfare programs
• Increased government spending


  Injects money into the economy, creating jobs, boosting consumer confidence, and stimulating demand
• During a boom


  The government may choose to decrease its spending to control inflation and prevent an overheated economy
• Reduction in government expenditure

  Reduces aggregate demand and helps stabilize prices
• Fiscal policy


  The use of government spending and taxation to influence the economy's overall performance
• Expansionary fiscal policy


  Increasing government spending and/or reducing taxes to boost aggregate demand during economic downturns
• Contractionary fiscal policy


  Decreasing government spending and/or increasing taxes to reduce aggregate demand and control inflation during economic upswings
• Automatic stabilizers


  Built-in features of the economy that help stabilize economic fluctuations without direct government intervention, such as unemployment benefits and progressive taxation
• During a recession


  Automatic stabilizers increase government spending and decrease tax revenue, which supports aggregate demand
• Multiplier effect


  The concept that an initial increase in government spending leads to a more than proportionate increase in aggregate demand as the additional income leads to further spending and re-spending in the economy
• Increased government expenditure can lead to budget deficits, which may have adverse long-term consequences if not managed properly
• The success of fiscal policy depends on various factors, such as the speed of implementation, magnitude of spending, and the overall economic environment
• Government expenditure plays a crucial role in influencing aggregate demand and, consequently, the trade cycle
• Through fiscal policy, the government can use its spending power to stabilize the economy during periods of recession and control inflation during boom phases
• Careful evaluation and management of fiscal policies are essential to ensure sustainable economic growth and stability