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Government Expenditure - Reflective Exercise

What is the effect of the London Olympics on the Economy?

Learning Focus

Developing an understanding of the government expenditure and taxation multipliers.

Threshold Concepts

Those pivotal to this learning are:

  • Cumulative causation
  • Equilibrium

Other threshold concepts used are economic modelling, marginality and general equilibrium.

The Scenario

The London Olympics in 2012 will involve government expenditure, including that on new stadia. This will be financed from various sources, including an increase in council tax. In this exercise, we will examine the effect of these fiscal changes. Other changes may also be involved, but we will limit ourselves to these effects at the present. We will treat council tax as a lump-sum tax (that is not dependent on income).

We start by asking some questions that relate to how an economist would approach this question. You will be expected to use information gained in this section later in your answers.

Question A

Tick however many of the following you think appropriate, then compare with an economist's answer(s).

(a) *We initially treat the particular expenditures and taxation just as 'government expenditure' and the 'taxation' in our analysis, without referring to the details in this case.
(b) *We need to consider the particulars of these expenditures and taxation as they are for a unique event.
(c) *We consider the detailed impact of the Olympic Games, how this affected local communities and finally how this interacts with more national concerns.
(d) *We shall consider real expenditures and income.
(e) *We shall consider money expenditures and income.


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Question B

Tick however many of the following you think appropriate, then compare with an economist's answer(s).

(a) *We will start by assuming equilibrium in the economy and trace changes through to another equilibrium
(b) *We will start by assuming equilibrium in the economy and consider the movement to disequilibrium.
(c) *We shall always be considering disequilibrium.
(d) *We shall start with disequilibrium and consider moving to equilibrium.

Question C

Tick however many of the following you think appropriate, then compare with an economist's answer(s).

(a) *We will start by examining the effects of the government expenditure and taxation separately as they may have different effects on the economy
(b) *Since government expenditure is an increase and taxation is a decrease in expenditure we can consider the overall effect by examining the net effect, not the individual effects and then summing these.
(c) *We start by considering what happens to various types of expenditure in the economy (such as consumer expenditure) when government expenditure changes.
(d) *We start by considering what happens to various types of expenditure (such as consumer expenditure) in the economy when taxation changes.
(d) *We start by considering simultaneously what happens to various types of expenditure in the economy when government expenditure and taxation changes.

Question D

Tick however many of the following you think appropriate, then compare with an economist's answer(s).

(a) *When considering the effect of the increase in government expenditure we shall examine what happens to withdrawals to the circular flow
(b) *When considering the effect of the increase in government expenditure, we shall examine what happens to injections and withdrawals to the circular flow.
(c) *When considering the effect of the increase in government expenditure we shall examine what happens to injections in the circular flow, not withdrawals.
(d) *In answering this question we need to discuss the direction of the effects, not the size.
(e) *In answering this question we need to discuss the direction and size of the effects.

Task

Go here for a further interactive question on the subject, and compare your answer with an economist's.

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