2.2.4 Government expenditure (G)

Question 1

Government spending

Answer 1

The government has a very significant part to play in the level of AD, through spending. They spend money on defence, education, the NHS etc. The impact of a rise in government spending depends on the changes in tax: if government spending and tax rise by the same amount then there is likely to be no overall increase in demand as people have less disposable income so C decreases but G increases.

Question 2

Influences of government expenditure

Answer 2

The trade cycle
Fiscal policy
Age distribution of the population *

Question 3

The trade cycle: influences on govt expenditure

Answer 3

Decisions over government expenditure may be made in order to manage AD, and therefore regulate the trade cycle. In a recession, the government may increase spending in order to increase demand to reduce unemployment. Government spending also automatically rises during a recession as they have to spend more on unemployment benefits. During booms, the government may decrease spending to decrease demand and reduce inflation.

Question 4

Fiscal policy: influences on govt expenditure

Answer 4

Some government spending is fixed from year to year, for example schools must be funded and pensions must be paid. However, governments can vary what they spend each year, and this is set out in their budget. Fiscal policy is the decisions about government spending and taxes and it will depend on the priorities of the government. The level of government spending depends on what they layout in their fiscal policy.

Question 5

Age distribution of the population **: govt expenditure

Answer 5

An ageing population leads to increased government expenditure on pensions, social care etc. whilst a young population leads to increased spending on education. The more dependents in the economy (the young and old), the higher government spending tends to be.