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Introduction
Real GDP Refers to every financial activity done by the government, including consumption, investment, and transfer payment. Each form of public spending is dependent on the availability of government revenue. Most governments use different approaches, such as taxation, to generate revenues (Moore & Prichard, 2020). While some obtain it from internal sources, including customs duties, investments, and public assets, others depend on external sources such as borrowing for the revenue. Public spending can be done in two ways; through final consumption or gross capital formation. Either way, the change in public expenditure is a critical factor in fiscal policy and can be used to stabilize an economy. In addition, government spending largely relies on the budget, with a surplus budget promoting it while a deficit delimiting the same.
Public expenditure can affect the Real GDP positively or negatively. An increase in government spending will likely trigger the real GDP to take an upward trajectory, while a decrease in the same may shift the GDP downwards. Defined as the total value of all the services and goods in a country after the inflation adjustment, the real GDP is the measure of the actual total economic output of a given country. GDP percentage values for the eight years keep changing in an alternating manner. However, increasing government spending will boost the real GDP in the following ways. One, increasing consumption will motivate economic activities such as production, which in turn increases the quantity of goods produced in the country, resulting in the rise of the real GDP. Raising the expenditure influences the aggregate demand and supply, which consequently accelerate production in a country. With the simulated surplus budget, the government in question is assumed to have enough revenue in excess to initiate the spending, which will subsequently raise the aggregate demand and supply and thus catalyzing production and the consequential real GDP through increased goods and services.
Besides, public expenditure can be initiated in the form of government investment projects such as agriculture. Increasing the spending is likely to double the investments that form part of the real GDP. For instance, a decision to improve expenditure on investment projects that increase production will enhance the quantity of goods and services in the country, thereby raising the real GDP. For example, public investment in a milling factory will trigger the production of goods in the same line, raising the real GDP. As in the case of the simulated surplus budget, the government enjoys excess revenue in disposal, which can initiate the spending on investment to raise the real GDP.
Unemployment
This is another component of the economy that is subject to government spending. Improved public expenditure can decrease the unemployment rate while a decrement can advance the same. Spending through consumption is known to affect the aggregate demand and supply by catalyzing production in a country. With the increase in demand and supply and the resultant output, unemployment is likely to reduce because jobless individuals will be absorbed in production firms and activities. For example, the demand and supply for a given good and service will trigger the creation of such items. People will be needed to work in the production line, reducing unemployment.
Similarly, public expenditure through investments can affect the unemployment rate by creating jobs. By raising the spending through investments, opportunities will be created, which will consequently absorb the jobless individuals. As in the example of a factory investment, jobs will be created in the program, lowering the unemployment rate. With the simulated surplus budget, the revenue will be available for initiating investments, lowering the unemployment rate. In addition, transfer payments such as pensions can be used for personal investments such as individual businesses, which can also create small employment opportunities. Therefore, increasing spending through increased transfer payments lowers the unemployment rate. In summary, upward changes in public expenditure will negatively impact the unemployment rate.
Impact of Interest Rate on Inflation
Inflation is usually characterized by high prices of goods and services due to high demand. The increased demand is attributed to significant disposable income due to excessive borrowing. However, by increasing the interest rate, individuals will shy off from excessive loans, thereby leading to a decline in disposable income which in turn lowers individual spending and the subsequent demand and, thus, low inflation. An upward change in interest rate will reduce the demand for goods and services, which will, in turn, affect the prices downwardly, leading to a fall in inflation (Van, 2019). On the other hand, lowering the interest rate will increase inflation since many persons will be willing to borrow money from lending organizations, causing their disposable income to rise and increasing the demand rate. With the increase in demand for goods and services, the prices will automatically shoot, triggering inflation. Similarly, the change in interest rate will impact other key microeconomic indicators, such as the GDP. Increasing the interest rate discourages borrowing, which means little money in circulation and thus lowers production programs.
References
Moore, M., & Prichard, W. (2020). How can governments of low-income countries collect more tax revenue? In K. Hujo (Ed.), The politics of domestic resource mobilization for social development (pp. 109-138). Palgrave Macmillan, Cham. Web.
Van, D. D. (2019). Money supply and inflation impact on economic growth. Journal of Financial Economic Policy, 12(1), 121-136. Web.
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