Government Spending Research Paper

The ability for a country to stabilize an economy is important for a country to survive. The economy of a country is either in an expansionary period or a contractual period or recession. Hall, R & Taylor, J (1993, p.257) identify two ways that the government can regulate the economy by either a monetary policy, adjusting the supply of money, or a fiscal policy. A fiscal policy is the policy of the government to control either government spending or taxation. Government spending includes changes in government purchases or transfer payments. Mansfield, E (1992) describes transfer payments as non-productive transaction in that the payment is made with no contribution by receiver. The ability to raise or lower taxes will affect the amount

In order to accomplish this the government could slow down government purchases as well as decrease transfer payments. A decrease in government spending would have a decrease in the GDP. Rittenberg, L. & Tregarthen, T. teaches us that Gross Domestic Product (GDP) is equal to consumption + investment + government purchases + net exports. With a decrease in transfer payments such as unemployment or welfare would also lead to a decrease in available money for consumption. With the period of expansion, we are experiencing in America the need for government transferees of unemployment pay have decreased with the increase in employment. Some transfer payments, such as unemployment pay, are automatic adjusters that kick in if unemployment rises. The government could decide to extend benefits to help spur the economy. When America needs to slow down inflation a decrease in transfer payments will lead to a reduction in spending. Consumer spending, or consumption is the first factor of calculating GDP. A decrease in consumption causes a decrease of GDP reducing the

During a period of expansion, like the one we are going through, businesses and individuals are enjoying the benefits of tax breaks and lower taxes. In order to slow down an inflation the government could reduce or eliminate tax breaks to businesses. This move would cost private business more money reducing the money that have available for investments. A reduction in investments would cause a decrease in the GDP. Another side effect of businesses having to pay more in taxes may reduce production. If products produced were exports this could also affect net exports. Just as tax breaks help to cause in inflation in the economy a reduction in the tax breaks will cause a deflation in the economy. Similar to business taxes changes in income taxes has an effect on the economy. During our period of expansion in America we have enjoyed lower income taxes creating more income for consumers. To slow an expansion the government can increase the taxes on individuals and consumers. The increase in taxes will create less income for consumption, less consumption would cause the GDP to decrease slowing the economy. The old saying “it’s time to pay the fiddler” characterizes the enjoyment of expansion and government spending. The money the government spends on government purchases and transfer payments will need to be paid back. One way to pay