Measures to correct excess/deficient demand - Government spending

Correct answer: A. It adds spending to the income flow

Government expenditure on goods, services, infrastructure, salaries or transfers can add to aggregate demand and introduce spending into the circular flow of income. It may stimulate production, employment and income, particularly when private demand is weak. The final effect depends on financing and economic conditions, but the expenditure itself is treated as an injection. Thus, option A is correct.

Correct answer: B. To increase aggregate demand and employment

During a recession, private consumption and investment may be weak, causing deficient aggregate demand and unemployment. Government expenditure on roads, schools, or other public works directly adds to demand and creates employment. Through the multiplier process, the initial spending may raise income and output by more than its original amount.

Correct answer: A. It adds government demand to total spending and the income flow

When the government buys goods and services, it adds demand to the economy’s spending flow and provides income to the firms and workers supplying them. This is why government purchases are treated as an injection in the circular-flow model. Transfer payments are different: they are not direct purchases of current output.

Correct answer: C. Government can withdraw and add purchasing power to the income flow

Taxes reduce the disposable income available to households and firms, so they withdraw purchasing power from the private circular flow and act as a leakage. Government expenditure puts purchasing power back into the economy by buying goods, services, and factor inputs, so it is an injection. Their combined effect is important for aggregate demand and fiscal policy.

Correct answer: B. Supporting aggregate demand and employment.

During a recession, weak private spending can reduce aggregate demand, output, and employment. Higher government expenditure is an expansionary fiscal measure that directly adds to demand and may support income and jobs through a multiplier effect. Its impact depends on factors such as financing and available productive capacity.

Correct answer: A. The effect of fiscal policy on demand

Government expenditure is an instrument of fiscal policy and is included in aggregate demand. An increase in government purchases directly raises demand for goods and services; through the multiplier, it can raise output and income by more than the initial expenditure, subject to economic conditions and leakages.