2.2.4 - Government Spending

Question 1

Define Government Spending

Answer 1

. Refers to government expenditure on goods and services

For example, they can provide public goods and services such as defence, education and healthcare

Question 2

Define budget surplus and budget deficit

Answer 2

Budget deficit - When government spending is greater than the government revenue from taxes and other investments. If this happens, it leads to governments loaning money from other countries, which will have to be paid back with a interest rate.

Budget Surplus - When government income or revenue from taxes exceeds expenditure, which means that the money can be spent in the economy on public goods and services.

Question 3

Name the three influences on government expenditure

Answer 3

. Trade cycle
. Fiscal policy
. Age of Population

Question 4

Explain Trade cycle

(Use trade cycle diagram in exam and refer to it throughout writing)

Answer 4

1.) If the economy is in boom, the government reduces government spending. This is because in a boom, there will be demand pull inflation. To reduce the level of demand of economy, government spending will reduced. Additionally, there will be a lesser need to spend in a boom due to a higher employment rate so less welfare benefits needed. By reducing government spending, AD contracts shifting inwards from AD1 to AD2.

2.) During the recession, government spending rises due to high unemployment and the needed for welfare benefits. This means that AD increases shifting outwards from AD1 to AD2, resulting in economic growth

However if government spending exceeds revenue from taxation, it will lead to a budget deficit, which means loans with higher interest are needed. This means that interest payments will be required, which will reduce government spending in the long term.

Question 5

Explain fiscal policy

Answer 5

. Fiscal policy refers to government spending and taxation to influence the economy. It is a demand - side policy

. During economic decline, expansionary fiscal policy is used so there will be an increased in government spending and a reduction in taxes. This means that AD will increase. This increases the size of the budget deficit

. During period of economic growth (boom), contractionary fiscal policy is used by decreasing expenditure and increasing tax. This means AD decreases and the rate of inflation falls. This also reduces the size of the budget deficit

Question 6

Why do governments spend money?

Answer 6

1.) Correct market failure and improve allocative efficiency

2.) Reduce inequality by spending on education, healthcare, social housing, training

3.) Influence economic activity e.g. government spending in recession to reduce unemployment and increased AD

Question 7

Explain Age of Population

Answer 7

. 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.