![]() For example, the government could increase spending and build new interstate highways and bridges. Second, government spending can create ripple effects in the economy as well. More spending creates more production, which creates more spending and more production, and so on. As new and current employees earn more income, policymakers hope those employees will spend some of it on goods and services, creating a ripple effect that will help the economy expand. ![]() As production increases, businesses will likely order more raw materials and equipment and hire additional workers or ask current employees to work more hours. And, if people spend more on goods and services, businesses are likely to increase production of goods and services. Policyholders hope people will spend some of this new, disposable income. Decreasing tax rates allows people to keep more of their income. Here’s how taxes and government spending may be used to fill some of the spending gap.įirst, taxes. In this case, the government might pursue expansionary fiscal policy to encourage the economy to expand, or grow. The level of spending by firms and consumers is simply not high enough to maintain full employment- there is a gap between the total level of spending in the economy and the level of spending that is needed to keep the economy fully employed. When a recession occurs, the economy contracts and the unemployment rate likely increases. Remember, the end goal is to stabilize the economy. ![]() Let’s take a closer look at recessions and inflation to see how taxes and government spending can create ripple effects in the economy. These are some fairly simple explanations of taxes and spending. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |