Sample Essay

It is also important to know the components of government spending. It has been stated that spending was done in defense, education and infrastructure. The relative proportions of spending done in each sub-category of government spending is also important. More spending in defense might statistically improve the GDP ratio in short term but does not good to the economic growth in the long run. Government spending in education and infrastructure provides better support to the GDP to grow.

More important than all factors is to see where did the government raise the capital for its expenditures. From its revenues? Or from borrowing from the Federal Reserve System. If the government revenues were less than its proposed expenditures, it would have borrowed from the central bank to finance its budget deficit. This reduces the money supply, increases the demand for money in the money market and results in increased interest rates. Increased interest rates choke investment that might have been planned and also decrease consumer spending that comes through credit purchases. Therefore, net spending in the economy is crowded out this is termed as crowding out effect. (McConnel & Brue, 2005)

Another factor could be the net export effect. Wherein, increased government spending would unwontedly increase interest rates. The increased interest rates would attract global investors to US money market. Therefore, demand for dollar will increase and as a result dollar would appreciate. As a result, the US consumers pay less for foreign goods and foreign consumers pay more for US goods. The US imports rise and US exports decline and the Net Exports (Xn) factor of GDP becomes negative. (McConnel & Brue, 2005)

Therefore, government failed to achieve the desired level of GDP through use of government spending. This is because of other factors effecting the GDP cast a shadow on GDP growth.

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