Question

An increase in government spending raises income: a. and the interest rate in the short run, but leaves both unchanged in the long run. b. in the short run, but leaves it unchanged in the long run, while lowering investment. c. in the short run, but leaves it unchanged in the long run, while lowering consumption. d. and the interest rate in both the short and long runs.

Answer 1

An increase in government spending raises income (B) in the short run, but leaves it unchanged in the long run, while lowering investment.

What is government spending?

• All government purchases, investments, and transfer payments are included in what is known as government spending or expenditure.
• Government final consumption spending is defined in national income accounting as the purchase by governments of goods and services for immediate consumption, to primarily meet the individual or collective needs of the community.
• Government investment is defined as the purchase of goods and services by the government with the intention of generating future benefits, such as infrastructure investment or research spending (government gross capital formation).
• Together, these two categories of government spending—on final consumption and gross capital formation—make up one of the primary parts of the GDP.

Therefore, an increase in government spending raises income (B) in the short run, but leaves it unchanged in the long run, while lowering investment.

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