When the government wants to spend money

Question

Quizplus · Accepted Answer

When the government wants to spend money, it can finance it through borrowing or raising taxes. If the government borrows, interest payments will have to be made in the future which may result in higher future taxes or reduced government spending. If taxes are raised, individuals and firms will have less money to spend and may reduce their consumption which would result in lower current consumption. Therefore, current consumption will fall if the government borrows or raises taxes.

When the Government Wants to Spend Money