CHAPTER 48
Government Spending and Taxes
LEARNING OBJECTIVES
Explain how the amount of government spending and government spending as a
proportion of GDP behave over the business cycle.
OUTLINE OF CHAPTER
I. The Trend of Government Spending, 1970-2001
Government and Aggregate Demand
Discretionary and Automatic Government Spending
ANSWERS TO END OF CHAPTER REVIEW QUESTIONS
Explain how the amount of government spending and government spending as a
proportion of GDP behave over the business cycle.
1. What are some automatic types of government spending? Does automatic government
spending tend to go up or down in a recession?
Federal spending rises slowly over the whole expansion and continues to climb in
2. What are some discretionary types of government spending?
Explain how government deficit behaves over the business cycle.
3. Does deficit spending help or hurt aggregate demand? Explain.
Deficit spending may help or hut depending on the economic situation. Deficit spending
4. Does the deficit usually go up or down in an expansion? Explain.
5. Does the deficit usually go up or down in a recession? Explain.
During a recession, the deficit rises. Government spending automatically increases in a
Explain how taxes behave over the business cycle.
6. Does automatic taxation tend to go up or down in a recession?
7. Explain why tax rates and tax revenues often decrease in recessions and increase in
expansions.
Federal taxes rise with income. Progressivity in the tax structure means that when
Compare and contrast how spending and deficit spending differ in times of war and peace.
8. How is government spending for war financed? What does this mean for the deficit if
taxes are not raised? If taxes are raised?
Government spending for war is typically financed by deficit spending. The deficit will
9. Does military spending always decrease during peacetime? What are other programs
that may receive extra funds during times of peace? What does this mean for the deficit
if taxes are not raised? If taxes are raised?