With reference to public expenditure and using suitable examles, distinguish between current, capital and transfer expenditure.
A government can fund public spending through taxation and/or borrowing. Discuss the possible consequences of its decisions.
When a government's budget deficit increases, this may lead to a worsening of the trade deficit. Explain why this might be the case.
Explain two reasons why there may need to be controls on the growth of government spending.
Explain why some economists consider crowding out to be important.
Define the terms 'national income multiplier' and 'investment accelerator'.
In a closed economy with no government sector, an increase in injections of $100 million causes the equilibrium level of national income to rise by $500 million. Calculate the marginal propensity to consume.
An open economy with a government sector is in equilibrium. Assume the following:
- Marginal propensity to save = 0.4
- Marginal propensity to tax = 0.2
- Marginal propensity to import = 0.2
Showing your method of working, calculate:
(a) the value of the multiplier
(b) by how much the equilibrium level of national income would fall, if injections in the economy are reduced by $60m.
Explain why increasing government expenditure is likely to have a larger multiplier effect than an equivalent reduction in taxation.
Government expenditure represents one of the injections of expenditure. Explain how an increase in government spending may have a multiplier effect on the economy.