Question

The government of Canada is spending unprecedentedly to curb the spread of COVID-19, revive the economy from economic recession and also ensure that a vaccine is found. Since February to date, the government has committed over 15% of GDP to COVID-19. The government is borrowing to finance its spending.

Drawing from what you have learnt on the topic "Expenditure Multiplier" and your prior knowledge, what do you think will be impact of these spending on the Canadian economy? Does this increased spending have negative implications for the economy, investors, and tax payers?

Kindly express your comments as often as possible. To earn more points, you need to respond to the comments of others and respond more than once.

Answer 1

The expenditure multiplier refers to the ratio of the change in aggregate production to change in an aggregate expenditure. It measures the change in aggregate production in the economy due to changes in expenditure. For basic level, the multiplier includes only the induced consumption. But complex multipliers may include a lot of components.
Formula of expenditure multiplier: 1/ 1-MPC or 1/MPS.
MPC – marginal propensity to consume
MPS – marginal propensity to save

The government of Canada increases the spending which will lead to increase in real GDP because of the expenditure multiplier impact. To cope with the rising problems due to covid19, the government is taking loans for spending. This also cause fiscal deficit in the economy. This refers to the negative balances that arise when government is spending more that it brings in the fiscal year.
Negative impact on economy –
This will crowd out private borrowing, affects the capital structures of economy and manipulate interest rates, decline in exports, and lead to high taxes and high price which cause inflation in the economy. It also causes a spike of unemployment and closure of business and industries. This will reduce the tax revenue and the government revenue from these taxes fall. This effect would be long-lasting. Moreover, to finance this deficit the government will start selling the securities which has direct impact on interest rates. Due to the financial institutes will also face a big problem and compete for the interest rate which is not good for the public.