Slide 46 of 49
Notes:
What may happen if government spending is increased? Well, essentially the same economic outcome that occurs when taxes are decreased. Flip back and take a look.
If the government were to increase military spending or highway spending for example, private companies would be awarded the bids. If the economy had high unemployment and under utilized production capacity, business firms awarded new government contracts would start cranking up employment and production. People would start going back to work. In this example, government spending was used to stimulate the economy, possibly pulling the economy from a recession. If the increased government spending is less than the tax revenues generated by the economy coming out of the recession, then the deficit may decrease. If not, the deficit will increase.
On the other hand, if government spending were increased at a time when the economy has low unemployment and is operating at or near production capacity; stimulating the economy further may result in inflation as managers opt to increase prices to stabilize inventories. Under this scenario, additional government spending will probably not be offset by increased tax revenues, and the deficit will probably increase.
