Government Expenditure and Fiscal Policy

1.

When the government expenditure increases, aggregate expenditure increases too. This is because government expenditure is a component of aggregate expenditure. Aggregate expenditure shifts upwards by the change in government expenditure (Parkin et. al., 2008). This increase in expenditure stimulates the economy because of the government expenditure multiplier effect. This is because an increase in government expenditure leads to an increase in consumption expenditure, which stimulates the economy and leads to GDP growth. The South African governments spending on infrastructure may have helped South Africa to avoid the worst of the global recession because it would have counter-acted the recessionary effect of falling aggregate demand on the GDP.

2.

To get the change in GDP one needs to divide the change in government expenditure by the marginal propensity to consumer.

△Y = △G_e/MPC

= R34.8 billion / 0.68

= R 51.2 billion

GDP increased by R51.2 billion.

3.

An increase in aggregate expenditure will increase aggregate demand, which in turn will increase inflation. It is a trade-off between economic growth and inflation. Because of the growth in GDP, the marginal propensity to import will increase. The increase in imports will reduce net exports and the national current account will diminish.

4

4.1 C)

4.2 B)

4.3 ?

4.4 B)

List of References:

PARKIN, M, POWELL, M, MATTHEW, K, 2008. Economics (7e). Essex, England: Pearson.