Question

1. What is the impact of a change in government spending on aggregate expenditure and economic...

1. What is the impact of a change in government spending on aggregate expenditure and economic equilibrium?

2. What is the impact of a lump-sum change in taxes on aggregate expenditure and economic equilibrium? How does it differ from a change in government spending?

3. How is the federal budget surplus or deficit defined? How has the federal budget position varied in recent years?

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Answer #1

Question 1

The government spending is a component of aggregate expenditure. Change in government spending brings a change in aggregate expenditure and thereby in economic equilibrium (equilibrium real GDP and equilibrium price level).

An increase in government spending brings an increase in aggregate expenditure. Given the aggregate supply, an increase in aggregate expenditure results in an increase in equilibrium price level and the equilibrium real GDP.

On the other hand, a decrease in government spending brings a decrease in aggregate expenditure. Given the aggregate supply, a decrease in aggregate expenditure results in a decrease in equilibrium price level and the equilibrium real GDP.

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