Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting the acquisition by governments of goods and . The figures below of 42% of GDP spending and a GDP per capita of $54, for the U.S. indicate a total per .. External links . The correlation between GDP growth and government spending's share of Taxes do cause some distortions, but in most cases these are. The nature and composition of government expenditure influences economic growth and social welfare. Therefore, government expenditure, which influences .
When real interest rates are r1 this is our output. That is a point on our IS curve.
Government spending - Wikipedia
We can draw the entire IS curve which might look something like that, that is our entire IS curve. If we kept changing this, if we kept trying this out for different real interest rates we could plot more and more of these points along the IS curve.
This is really thinking in terms of, if real interest rates go up then this whole expression will go down then this thing will be shifted down and so we would have less GDP. If this gets shifted down your equilibrium GDP might go over here.
At a higher real interest rate you would have lower aggregate income. That's how we actually thought about plotting our IS curve. Now, with all of that out of the way, let's think about what happens when government spending goes up.
Well, if government spending goes up, if this piece right over here goes up, that will shift our planned expenditures up as well. So your change in government spending, change in G, it would shift this curve up.
Let me draw that a little bit neater. It would shift this curve up and you would get to a new level of income or equilibrium level of real GDP. That amount, this delta Y which is this amount right over here. It's actually going to be equal to the multiplier which is 1 minus the marginal propensity to consume times our change in government spending. You don't have to worry about this too much for the sake of this video, that's just a little bit of a review. The whole reason why I'm going this is we're saying, "Look, assuming r1 didn't change "and when we increased government spending "it shifted GDP up by that amount.
Well, that would be true at any of the real interest rates along the IS curve. In general, if you increase government spending and you're not changing any of this other stuff then the IS curve would shift to the right.
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If you decreased government spending the IS curve would shift to the left. With that in our toolkit now, we can think about how a change in government spending might change our equilibrium point in our IS-LM model. Once again, real interest rates.
Our IS curve looks something like that.MBA Econ Lecture 18: Taxes and Government Spending*
Our LM curve, I will do it in magenta. Our LM curve might look something like that.
The Relationship between government spending and tax revenue in Kenya
So, if we have a increase in government spending, we already saw the IS curve shift to the right. I want to do that in the same color.
- Government spending
It shift to the right and it might look something like that. If our old equilibrium real interest rate was sitting here and equilibrium income was sitting here, we saw that by increasing the government spending our new equilibrium GDP is higher and our new equilibrium interest rate is higher just by the shift to the IS curve.
Now, you might be saying, "Okay Sally, you've been focusing on the IS curve "but does an increase in government spending, "does it affect the LM curve? Remember, the LM curve, it's driven by people's liquidity preferences. Government spending can be a useful economic policy tool for governments.
Expansionary fiscal policy is an increase in government spending or a decrease in taxation, while contractionary fiscal policy is a decrease in government spending or an increase in taxes. Expansionary fiscal policy can be used by governments to stimulate the economy during a recession.
Government spending and the IS-LM model
For example, an increase in government spending directly increases demand for goods and services, which can help increase output and employment. On the other hand, contractionary fiscal policy can be used by governments to cool down the economy during an economic boom.
A decrease in government spending can help keep inflation in check. Automatic stabilization is when existing policies automatically change government spending or taxes in response to economic changes, without the additional passage of laws. Discretionary stabilization is when a government takes actions to change government spending or taxes in direct response to changes in the economy.
For instance, a government may decide to increase government spending as a result of a recession. According to Keynesian economicsincreased government spending raises aggregate demand and increases consumptionwhich leads to increased production and faster recovery from recessions. Classical economistson the other hand, believe that increased government spending exacerbates an economic contraction by shifting resources from the private sector, which they consider productive, to the public sector, which they consider unproductive.
The downward sloping demand curve D1 represents demand for private capital by firms and investorsand the upward sloping supply curve S1 represents savings by private individuals.