Areas Affected by Changes in Public Expenditure

Question 1

What are the areas affected by changes in public expenditure?

Answer 1

productivity and growth
living standards and equality
crowding out

Question 2

Productivity and growth

Answer 2

increased government spending increases AD
could also shift out LRAS if improves productivity e.g spending on healthcare
(depends how spent though)

Question 3

Living standards and equality

Answer 3

increased government spending e.g on benefits should increase living standards and improve equality
(not always improved - money spent on other areas that don’t help the poor e.g military)

Question 4

Resource crowding out

Answer 4

when public expenditure decreases the resources available to the private sector
(show on PPF)
as all resources already being used effectively

Question 5

Financial crowding out

Answer 5

an increase in government borrowing increases the demand for borrowed money, which then increases the interest rate - less appealing for firms to take out loans and invest