2.2.4: Government Expenditure

Question 1

What are the two main influences in government expenditure?

Answer 1

1. Trade Cycle: The trade cycle, or business cycle, refers to the fluctuations in economic activity that an economy experiences over a period, typically measured by changes in GDP and other economic indicators.
2. Fiscal Policy Decisions: Fiscal policy involves government decisions about spending and taxation to influence the economy.

Question 2

Explain how the trade cycle influences government expenditure.

Answer 2

1. Expansion: Rising economic activity, employment, and income levels. Governments might reduce spending due to increased tax revenues and lower unemployment benefits.
2. Peak: Economic activity is at its highest. Government expenditure may stabilize as revenues peak.
3. 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.
4. Trough: Economic activity is at its lowest. Government spending is typically high to counteract the recession.

Question 3

Explain how the fiscal policy decisions influence government expenditure.

Answer 3

Components:
Government Spending: Includes expenditure on goods and services, infrastructure, education, and defense. Example: The U.S. government’s increased spending on infrastructure projects during economic downturns.
Taxation: Adjusting tax rates to control economic activity. Lower taxes can stimulate growth, while higher taxes can cool an overheated economy. Example: The 2017 Tax Cuts and Jobs Act in the U.S. aimed to stimulate economic growth.

Types:
Expansionary Fiscal Policy: Used during recessions to boost economic activity through increased spending and tax cuts. Example: The American Recovery and Reinvestment Act of 2009.
Contractionary Fiscal Policy: Used during booms to cool down the economy by reducing spending and increasing taxes. Example: Budget surpluses and reduced public spending in the late 1990s in the U.S.

Question 4

What are some other influences on government expenditure?

Answer 4

1. Political Factors: Government priorities, party policies, and political stability can significantly impact spending decisions.
2. Social Needs: Demographic changes, such as aging populations, can increase expenditure on healthcare and pensions. Example: Japan’s rising healthcare costs due to its aging population.
3. Economic Conditions: Inflation rates, unemployment levels, and economic growth can affect government spending. Example: Increased unemployment benefits during high unemployment periods.
4. Debt Levels: High public debt can constrain government expenditure due to the need for debt servicing. Example: Greece’s austerity measures post-2008 financial crisis.
5. External Factors: International events, trade relations, and global economic conditions. Example: Increased defense spending during geopolitical tensions.

Question 5

Name two key economists and explain their contributions government expenditure decision making

Answer 5

1. John Maynard Keynes: Advocated for increased government expenditure and lower taxes during recessions to stimulate demand (Keynesian Economics).
2. Milton Friedman: Criticized Keynesian policies, emphasizing the role of monetary policy over fiscal policy in managing economic cycles (Monetarism).

Question 6

Define:
1. Trade Cycle
2. Fiscal Policy
3. Expansionary Fiscal Policy
4. Contractionary Fiscal Policy
5. Public Debt
6. Monetary Policy

Answer 6

1. Trade Cycle: Fluctuations in economic activity over time, marked by phases of expansion and contraction.
2. Fiscal Policy: Government strategies involving taxation and spending to influence the economy.
3. Expansionary Fiscal Policy: Policies designed to stimulate economic activity, typically through increased spending and tax cuts.
4. Contractionary Fiscal Policy: Policies aimed at reducing economic activity, often through decreased spending and higher taxes.
5. Public Debt: The total amount of money that a government owes to creditors.
6. Monetary Policy: Central bank actions involving the money supply and interest rates to influence the economy.