Unit 4: January 2012 The European Union Context (05)

(05) Extract D( lines 1-2) refers to EU governments spending their way out of recession.

Explain the term ‘spending their way out of recession’ and analyse two reasons for government spending other than to influence the economic cycle.

Spending their way out of recession means there is expenditure by the government in order to help increase aggregate demand which is the total spending in the economy. This can be shown by the diagram where price level increases from r0 to r1 while output increases from yo to y1.

from google images

This could be spending on new infrastructure such as roads, hospitals and this would mean an injection to the circular flow of income. This could lead to a multiplier effect whereas an there is a bigger proportional increase in GDP than what is put in for example there could be the creation of new jobs due to this spending therefore leading to more spending from people in these jobs. This spending will carry on and overall the country benefits potentially be out of recession.

Another reason why there is government spending other than influencing the economic cycle would be government would want to spend to help alleviate such as welfare benefits and job seeker’s allowance where people would have a chance for a higher income, extremely important for people who are disabled and cannot find a job.

Additionally the government may spend money on supply side reforms such as education and training and help them to be introduced and developed which can help the economic cycle but that is in the long term. Supply side reforms like training could help people have better prospects when trying to find a new job, they could apply for higher skilled jobs. This can also help people alleviate from poverty and reduce the number of people in long term poverty. Attempting to help improve the standard of living of some households.

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