What would be the impact of changing the determinant variables given in the first column (below) on Government Spending? Factors affecting Govt. Spending Effect on Government Spending Government prepares for election Economy at the recession phase of business cycle Low level of poverty More need for merit goods No need for further infrastructure Less population Economy is at the boom phase of business cycle
- What would be the impact of changing the determinant variables given in the first column (below) on Government Spending?
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Factors affecting Govt. Spending |
Effect on Government Spending |
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Government prepares for election |
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Economy at the recession phase of business cycle |
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Low level of poverty |
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More need for merit goods |
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No need for further infrastructure |
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Less population |
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Economy is at the boom phase of business cycle |
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When the government prepares for the elections, the main objective of the government will be to maintain the power within their hands. For this purpose, the government will make use of the expansionary fiscal policy such as increasing the transfer payments, reducing the tax rates, and increasing government spending in the economy so as to attract the likes of the society. Thus, there will be an increase in government spending in the economy.
The recession is a period of the economic downturn in the economy where the private investments will not be made in the economy. The unemployment will shoot up during the recession period and this crisis can only be handled with the expansionary fiscal policy because the government spending will not be based on the profit motive and thus increases the employment and output of the economy. Thus, government spending will increase in this period also.
When the level of poverty is lower in the economy, then it means that the government needs to spend lower in order to eliminate poverty which is a very big social as well as an economic evil. When the government policies focused to reduce the poverty decreases, then government spending will also decrease in the economy.
The merit goods are those goods which are provided free of cost or at cheap rates mainly in order to increase the consumption of such goods from consumers which is mainly encouraged by the government. Thus, the government needs to make the merit goods required for the economy and this means that when there is more need for merit goods, then government spending will increase.
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