Spending and the Economic Stimulus

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Table of Contents

What influences our spending during the slow economy?
How much can our spending create multiplier effects on the economy?
What about the MPC
Reference List

What influences our spending during the slow economy?

In a slow economy, the expenditure by the government is reduced, and thus, the economy is contracted. The government, in a slow economy, has to spend lower than at normal circumstance.

The effect that a lower government spending has on individuals, whether companies or people, is a reduced social service whose results shape the direction where funds are directed; generally spending is in the area of home consumption (this is at the expenses of investments), the direction is to this end because of reduced incentives to invest by lack of government expense on social amenities (Klieth, David & Lawrence, 2008).

How much can our spending create multiplier effects on the economy?

The multiplier effect is an economic concept used to estimate the degree of change to national income when an injection is made in an economy. The injection may be from the government directly or measures that lead to an indirect injection from the government. When the population is more willing to spend, then it means that there will be minimal withdraws from the economy and thus there will be a bigger multiplier effect.

When the population, on the other hand, is not willing to spend in the country, then there is a large withdraw from the economy in terms of social amenities with a reduced taxable population. The multiplier effect is never more than one. The degree to which individuals are willing to spend will determine the degree of influence that they will have on the multiplier (O’Sullivan & Sheffrin, 2003).

What about the MPC

When people increase expenditure, it will result in more consumption of goods and services. This will lead to an increased MPC, which will reach a maximum point, and any other additional expenditure will reduce MPC.

Do you think an increase in government’s spending (G) can boost the Aggregate Demand (AD) in the recession?

The aggregate demand curve is a curve that cuts across all possible compositions in an economy given a certain income level in the economy; it is represented as follows;

AD = y = C + I + G

If the government increases its expenditure in the economy, the aggregate demand increases. During a recession period, the amount of money available in the economy for expenditure is reduced. The government can inject money directly into the economy by participating as a trader in a country’s market, it can also establish different industries, or it can indirectly spend to facilitate investment. Whichever the route it decides to take, there is a positive effect on the economy.

Government expenditure has a positive multiplier effect of not more than one. When the government invests in the economy, there results in a crowding effect on private investors. Unlike individual consumption, government expenditure is regulated, and thus, it is easy to control the economy.

Why have businesses left it to the consumer to carry the nation recently?

In the recession period, consumption in the economy will lead to aggregate demand for goods and services. Spending will induce money in the economy, which in turn will affect the economy positively. If the expenditure is facilitated, then chances of recovery are higher than when business expenditure (in terms of investments) is increased.

In all economies personal Consumption Expenditures account for the largest amount of government revenue; thus, when facilitated, it is likely to lead to a quicker recovery from the recession (Hall & Lieberman, 2008).

Different governments are bailing out corporations to maintain them in business and reduce the effect that they might have if they fall. Such companies include American International Group Inc. the company was bailed out to ensure that the government protects the interest of policyholders. This will lead to more confidence from the policyholders and thus, a positive effect on the economy.

In the United Kingdom Royal Bank of Scotland (RBS), Lloyds TSB and HBOS were bailed out with a total of 37billion pounds, the reason behind this was to enable banks to lend at a favorable rate (BBC. News Monday, 13 October 2008). With increased lending, there will be much expenditure in the economy and thus facilitated recession.

Expenditure by the public and not by a business means that there is increased aggregate demand for goods, but the aggregate supply of goods will not be proportionate. In a PPF curve, there is a comparison of various production level given the efficiency available in a country. In a consumer facilitated economy, then there will be a production to what the consumers are buying, it follows the trend of consumers, the result will be switching of production lines/ area to another leading to structural unemployment (Samuelson & Nordhaus, 2004).

In expenditure facilitated economy, the rate of investments projects in the country is minimized, and thus, the economy does not create more job opportunities. In a slowing economy, there is a reduced expenditure by the government, and thus the rate that the economy creates employment opportunities with will be reduced.

Reference List

BBC News. (2008). UK banks receive £37bn bail-out. Web.

Hall, R. & Lieberman, M. (2008). Macroeconomics: principles and applications. Mason, OH: Thomson/South-Western.

Klieth, A., David B. and Lawrence, B. (2008). The financial crisis and rescue. What went wrong? Why? What lesson can be learnt? Toronto: university of Toronto press.

O’Sullivan, A. & Sheffrin, M. (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall.

Samuelson, A., Nordhaus, W. (2004). ch. 1, sect. C,”The Production-Possibility Frontier,” pp. 9–15; ch. 8, Section D, “The Concept of Efficiency”. New York: McGraw-Hill. Web.

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