ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -CROWDING OUT PRIVATE SPENDING AND EMPIRICAL EVIDENCE Taxes finance government spending; therefore, an increase in government spending increases the tax burden on citizens-either now or in the future-which leads to a reduction in private spending and investment. This effect is known as “crowding out."

Detailed explanation-2: -Shifts in the IS curve: As government spending increases, output increases for any given interest rate. IS Curve: At lower interest rates, equilibrium output in the goods market is higher.

Detailed explanation-3: -An increase in the money supply ( M) without an increase in output ( Y) causes the price level to change by the same change in the money supply. In other words, output doesn’t change, but when the money supply doubles, the price level also doubles.

Detailed explanation-4: -An increase in government spending is one of the factors that economists say can drive inflation. Other factors include interest rates, monetary policy, supply chain disruptions and fluctuations in demand for goods and services. Inflation can be an important consideration for investing, saving and borrowing.