Government spending

Topics: Economics, Monetary policy, Macroeconomics Pages: 2 (444 words) Published: October 14, 2013
Government Spending

Government Spending

Government Spending
According to the principles of micro economic theory (which does not take into account aggregate, or national demand, but only considers particular spheres of demand in the national economy) as prices decrease, average consumer demand will increase. For example: Oranges=60 cents/Average Consumer Demand=2

Oranges=40 cents/Average Consumer Demand=4
Eventually, even if individuals have less money to spend due to a rising national unemployment rate, micro economic theory suggests that producers will have to price their goods so cheaply, that demand, production, and thus employment will all increase. However, this has not always proved the case, as when one's personal employment seems uncertain, consumers are apt to hoard their savings. This is a wise personal or micro economic decision, but is unwise for the national economy as a whole. This means that production, no matter how low producers set prices, is never stimulated by a corresponding rise in demand. Goods pile up, and more workers are laid off. The solution to this problem of consumer hoarding is to increase government spending, ideally in economic sectors that private industry is unlikely to explore, so as not to overlap into the areas of development that the newly stimulated economy will wish to hire new workers. However, according to the article on government spending in Moneychimp.com's archives, many libertarian economists still dispute this Keynesian solution to spend at a deficit, to temporarily stimulate productivity. They fear that government deficits can create a drag upon the economy-however conservative economists who suggest tax cuts as a remedy, especially cuts that favor wealthy investors do not always stimulate additional spending of the given revenue, as the cuts may merely stimulate more hoarding amongst ordinary consumers, or stimulate long-term investment on the part of wealthy...

References: Government spending diagram. (2006, January 31). Retrieved from Money Chimp website:
http://www.moneychimp.com/articles/econ/government_spending.htm
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