ECO610 Discussion 1 Week 4 Money and Wealth

1. Explain the challenges the United States will face with increased government spending.

An increase in government spending automatically affects society and individuals in particular. For instance, an increase in government spending directly affects the cost of living through subsidies that result in inflation. When government spends a lot, the citizens suffer from inflation which makes them dig deeper into their pockets to access basic commodities at a higher price. On the other hand, subsidies also lead to a high cost of living (Forbes, 2014). Although the government may try to inject more capital into the economy, larger deficits are created in the long run. The debt is what, in turn, contributes to inflation in such a country. When the government suffers financially, it may be driven to borrow and survive on debt. Debts on their own affect the rate of inflation in a nation. For example, to pay off the money borrowed by a country, commodities prices are increased to meet the debt service obligation.

2. What will directly impact the overall economy and economic growth: an increase in government spending or a decrease in taxes?

Both options, an increase in government spending and a decrease in taxes, are likely to lead a nation to inflation, which affects the cost of living. However, they both have individualized benefits. For instance, increasing government spending is likely to improve the level of productive investment from which economic growth stems and a country can potentially secure development. On the flip side, increased spending may lead to financial struggle that may lead to borrowing, which results in a rise in interest rates. When interest rates are higher, private investments tend to suffer the blow firsthand, resulting in a lowered output growth that affects the development of a country. However, decreased taxes fuel spending power, and increasing demand leads to higher and stronger economic growth than increased government spending.

Reference

Forbes, S. (2014, September 30). Forbes. https://www.forbes.com/sites/steveforbes/2014/09/30/money-is-not-wealth-but-it-helps-create-wealth/?sh=145808e4f910Links to an external site.