• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Examine two reasons why a government might wish to control increases in its expenditure

Extracts from this document...

Introduction

Examine two reasons why a government might wish to control increases in its expenditure Increases in government expenditure will shift the Aggregate Demand (the sum of all demand within an economy) outwards. This is called an expansionary fiscal policy (fiscal meaning relating to government spending), and may be implemented to stimulate an economy if it is in recession. Another type of fiscal policy is called contractionary fiscal policy, and is used to help control demand pull inflation. Demand-pull inflation is the increases in prices at a relatively higher rate than increases in income. This occurs when demand is greater than supply. A government may wish to control increases in its expenditure for a number of reasons, including controlling the extent of government intervention, letting market forces act and to prevent crowding out. The two reasons that I will examine are to keep the tax levels down and to control inflation. ...read more.

Middle

To finance this, governments go into debt. Again this situation is planned, and may occur because governments are spending lots to stimulate the economy in a recession. Finally, a balanced budget means that taxation revenue is equal to government consumption, and there is no deficit or surplus. A government may wish to control its increases in expenditure in order to control the rate of taxes. For example, the government is currently improving the Geelong Highway at a cost of $120 million1. If, as Mr Bracks has promised, there is no toll for use of the freeway, taxpayers will bear the cost of this improvement. This is because governments do not wish to go into budget deficit, and will have to increase revenue if they are to balance the budget. Some of this increase in revenue may come from more speed cameras on the new freeway, however most will come from an increase in taxes, if the government does not decrease spending in other areas to accommodate. ...read more.

Conclusion

All else equal, government expenditure will increase Aggregate Demand, which will then increase inflation. This situation can be seen in the diagram below, when the economy is operating at an intermediate range, as Keynesian economists argue it usually does. The diagram shows that an increase in AD from AD to AD1, caused in this case by an increase in government spending, will lead to an increase in the general level of prices from point y to x. It is therefore clear that a government will not want to increase expenditure if it wishes to control inflation. Indeed, a government may wish to implement a contractionary fiscal policy, where they decrease expenditure and tend towards a budget surplus. This will decrease the rate of inflation back to manageable levels and also create surplus money which can be used to pay off past debt, as explained above. In conclusion a government may wish to control its spending for a variety of reasons, including controlling tax rates by manipulating the budget and controlling inflation by deflating aggregate demand. 1 http://www.dpc.vic.gov.au/domino/Web_Notes/MediaRelArc02.nsf/0/5a60b8c8d23890e74a25689300063fdf?OpenDocument&Click= Accessed Tuesday 31/8/2004 2 http://quote.bloomberg.com/apps/news?pid=10000080&sid=aExLNFVCBExs&refer=asia accessed 31/4/2004 ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Here's what a star student thought of this essay

3 star(s)

Response to the question

This essay has a clear answer, looking at why the government is controlling its spending. I think the crux of this question lies in the "increases in government spending". This essay identifies this, and these is some discussion of spending ...

Read full review

Response to the question

This essay has a clear answer, looking at why the government is controlling its spending. I think the crux of this question lies in the "increases in government spending". This essay identifies this, and these is some discussion of spending growing too quickly, causing a budget deficit and other relevant points. It is key not to deviate from the question, as it's easy to assume this is simply wanting a discussion of what effects government spending can have on the economy. It was good to see that one of the two reasons was controlling inflation, but I would've made the second reason more explicit in maintaining a budget surplus or a low budget deficit, rather than keep taxes down.

Level of analysis

The analysis here is good. I liked how key concepts were defined instead of simply used. For example "Surplus means that the government is spending less than what it receives" shows a good understanding. To improve this definition, I would've included "what it receives in tax revenue" to show the examiner you are differentiating from any other types of inflow. To take this answer to the next level, there needs to be a discussion of the importance of budget deficits and how they are detrimental to an economy. This is very topical, and it would be easy to draw upon the huge debt levels of Greece and what this has done for their international status. At A-Level, it's not good enough to say governments want to keep a budget surplus without stating why. The diagrammatical analysis for inflation is strong, with the Keynesian long-run average supply curve making a clear example of demand-pull inflation. Although simple, I particularly like the sentence "The diagram shows that an increase in AD from AD to AD1, caused in this case by an increase in government spending, will lead to an increase in the general level of prices from point y to x" as it shows the skills necessary to interpret the diagram, thus showing understanding. Once again, I think there needs to be a discussion of why keeping inflation stable becomes important to an economy.

Quality of writing

The structure here is fine. There is a clear introduction and conclusion. However, some of the introduction is unnecessary. For example "I will examine" is not a sophisticated way to write at A-Level. It's much better to say "Two main reasons are" and not use the first person. The conclusion adds nothing to the argument, whereas this is the perfect place to add a last judgement or perceptive point. Ending on a strong note is often where the final marks for an essay are allocated, and sentences such as "the extent to which governments must control increases in their spending depends upon" will gain the top marks. Spelling, punctuation and grammar are fine.


Did you find this review helpful? Join our team of reviewers and help other students learn

Reviewed by groat 02/04/2012

Read less
Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. Marked by a teacher

    I will be evaluating on the article "UK inflation drops to Bank target" by ...

    3 star(s)

    Interest rates are normally expressed as a percentage over the period of one year. Below I will present the important facts in the article (highlighted in bold) together with the application of concepts, analysis, synthesis and evaluation of those facts.

  2. Peer reviewed

    How can inflation be reduced?

    5 star(s)

    Classical economist also argue that governments should also cut taxes in employment, by doing this businesses are likely to be more incline to hire people as they will not face the burden of being taxed heavily. Another way to help businesses thrive is to reduce "bureaucratic red tape".

  1. Peer reviewed

    Stimulating an economy in recession

    5 star(s)

    to increase investment. Decreasing taxes and government spending allow firms to allocate resources more efficiently which would increase output. 2. Evaluate the effectiveness of these policies. Expansionary fiscal policies were used in the 1950s and 60s to increase aggregate demand and real output.

  2. Examine possible factors which might have led to changes in the value of the ...

    Nevertheless, the improvement in the balance of payments may not necessarily occur in the long run due to the Marshall Lerner condition which states that a significant devaluation will only improve the balance of payments if the sum of the price elasticity of demand of exports and imports was greater than one - i.e.

  1. Pakistan is in the grip of a serious energy crisis that is affecting all ...

    lives and businesses of people but has also added to their miseries. It has impeded the growth of both small scale and large scale businesses. Industrial progress is in shambles owing to the unpredictable and the unreliable power supply.The shopping malls and the open markets that were once swamped by the customers are now dark and deserted.

  2. What are the government objectives? Explain why each is important and how the government ...

    balance of payments, and why this is of great significance to the economy and aiding its growth. The balance of payments is a summary of transactions concerning visible and invisible goods and services, investment earnings and transfers (the current account)

  1. What are the Government's main economic objectives?

    The magnitude of the deregulations will also be reduced by the addition of further regulations entrenched in incentives and initiatives introduced in the near future. Whilst Gordon Brown announced that the government was closer than ever to achieving full employment throughout the UK, he explained the second stage of Britain's New Deal.

  2. Governments set economic objectives - Discuss the relative importance of each of these objectives ...

    This, however, was a failure when Korean company, LG, was given an incentive by the European Union Funding to set up in Newport. Millions of pounds were spent in setting up factories ready for the company to move in. Now there stand empty factories as LG pulled out of the contract.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work