Question

In: Economics

What effect do governments prefer to pay for the deflationary deficit transfer payments compared to whether...

What effect do governments prefer to pay for the deflationary deficit transfer payments compared to whether they prefer to spend?

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Expert Solution

Deflationary situation means when there is a less national expenditure compared to overall national income at full employment level. Or in other words we can say that when equilibrium level of output is less as compared to ouput at full employment level of equilibrium.

Government use Fiscal policy to correct this deflationary situation

Government spending can be done on two -

  1. Spending - IT is the expenditure on goods and services like expenditure on infrastructure , expenditure on construction of roads etc.
  2. Transfer payments - These payments are one side payments it does not include any purchase of goods or services. For example, Scholarships, pensions, social security benefits etc.

In case of deflationary situation government increase their spending and increase their spending on Transfer payments.

When government prefer spending more that lead to building infrastructure , roads etc so this lead to better transport facility that boost up the economy as now production increase , aggregate demand increase that lead to economic growth of the economy.

When government prefer transferpayment as we know now as it does not include any economic activity its a one side payment but it provide benefits to the individuals like pensions , scholarship that lead to well being of the individuals. This will incraese their skills that lead to more employment , more employment more output , more output more growth. ON the other hand spending on more on transfer payment lead to budget defecit with reduction in taxes so this will lead to increase defecit and reduce budget surplus.


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