Government Expenditure Worksheet - How much expenditure?

This worksheet deals with how the level of government expenditure affects the macroeconomy. It looks at the impact of changing the level of spending on growth, inflation, unemployment and the PSNCR.

There is also a printable version of this worksheet available for classroom or personal use with spaces to fill in the answers.

Step 1 - A demanding government

The level of government expenditure is a key component of aggregate demand . Fill in below all the other components of aggregate demand:

AD = ___ + ___ + G + ( ___ - ___ )

Any deliberate changes in the level of government expenditure in a Budget will therefore have a big effect on aggregate demand. Show on the diagrams below the effect of increasing or reducing the level of government spending.

1...Increasing the level of government expenditure

2...Reducing the level of government expenditure

Fill in the table below with the impact these changes will have had on other economic targets:

Step 2 - Were your expectations great?

Let's now experiment on the model to see if the predictions you made in Step 1 were accurate. Go to the model (you can also access the model from the 4th floor on the side panel or the top navigation bar) and try the following:

1. Increase the level of government expenditure by 10%
2. Increase the level of government expenditure by 20%

Record the results in the tables below:

1...Increasing government expenditure by 10%

2...Increasing government expenditure by 20%

What disadvantages have there been to these policies?

Step 3 - Breaking the cycle

Use the glossary to find out the meaning of the term (counter-cyclical) demand management and note down a definition.

Not all economists believe that the government should actively seek to manage the level of demand in the economy. Use the Library (3rd floor) to find out the views of different groups of economists about demand management. Write a brief summary of these views under each of the headings below:. Write a brief summary of these views under the headings of Keynesian and Classical economists.

If the government does choose to use demand management as an active tool to manage the economy, what should it do to the level of government expenditure over time?

What problems might there be from managing the economy in this way?

Step 4 - Try it

Now try using the level of government expenditure as the principal tool of economic management. Go to the model and look carefully at the forecasts. Now try to change the level of government expenditure to achieve the following over the 10 years:

• A high but stable level of economic growth
• Inflation below 4%
• A PSNCR that stays below £40bn

Experiment to find out the changes that achieve these the most effectively. What changes did you make? Note the changes you made and the levels of economic growth, inflation and PSNCR for each year below:

What is the reasoning behind the changes you have made? Why do you think they did or did not work?

Intro | W1 | W2