How Effective Would an Increase in Government Spending Be...

How effective would an increase in government spending be at promoting economic growth? Economic growth is best defined as a long-term expansion of the productive potential of the economy. Sustained economic growth should lead higher real living standards and rising employment. Short term growth is measured by the annual % change in real GDP. Government spending is a way of increasing aggregate demand, and if successful can help boost economic growth. Government spending tends to be directed at infrastructure and maintenance, as this not only creates jobs but creates a valuable asset. (AD DIAGRAM) (AS DIAGRAM) (DESCRIPTION) Some government spending is necessary for economic growth as if it were zero, enforcing contracts,†¦show more content†¦Flood insurance programs encourage construction on flood plains. Government programs likes this reduce economic growth and national output because they promote underutilisation and misallocation of national resources. One could argue that government programs that subsidise retirement and housing are bad for the economy as a person will feel that there is not need to set aside income if there are government programs that will finance these for them. Goverment spending also reduces competition. Those working in the private sector are constantly searching for ways to improve their products and reduce the cost in order to stand out from the rest, and this provides competition for others attempting to do the same, and this is a large contributor to innovation. However government programs are often provided for free, or are subsidised to a certain extent, so reduce the need for competition. This does not mean that there are no positives to increased government spending. If government spending increases there can be many ancillary effects. 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