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Chapter 27: Problem 8

In 2017, in proposing a \(\$ 1\) trillion increase in government spending on infrastructure, President Trump argued that the spending would increase total employment in the United States. a. Will increases in federal spending always increase real GDP and employment in the short run? Briefly explain. b. Are there circumstances in which the federal government would not want to increase its spending, even if the result was to increase real GDP and employment in the short run?

Short Answer

Expert verified
Increases in government spending can increase real GDP and employment in the short run, but not always, especially if the economy is already at full employment. There can also be situations where the government would not want to increase its spending, such as due to concern over national debt or inflation.

Step by step solution

01

Understanding the impact of government spending

Infrastructure spending is a type of government spending that can boost the aggregate demand. In the short run, an increase in aggregate demand can increase the output, which is the real Gross Domestic Product (GDP), and employment. The reason is in the short run, prices are sticky or fixed, so any boost in demand leads to higher output and employment levels.
02

Government Spending Always Increasing Real GDP and Employment

While the general principle is that increased federal spending should increase real GDP and employment, it doesn't mean this is always the case. There are scenarios where this doesn't work. For instance, if the economy is already at full employment before the spending increase, instead of resulting in more output, the increased spending may result in an overheated economy, inflation, and could lead to economic decline.
03

Situations where Government Would Not Want to Increase Spending

Even if increased spending could increase real GDP and employment, there may be reasons why the government wouldn't want to do this. For instance, if the spending results in a significant increase in the country's debt, the long-term economic effects may be more harmful than the short-term benefits. Additionally, if the government has other policy priorities or if the measure is projected to cause a surge in inflation, it may choose not to increase spending.

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