What is the impact of government spending on economic activity?

The impact of government spending on economic activity is best captured by the concept of the multiplier effect. When the government increases its spending, it directly injects money into the economy. This spending can take the form of funding for infrastructure projects, education, healthcare, and more, which creates jobs and stimulates demand.

As the government spends, the recipients of this spending—such as contractors, workers, and suppliers—are likely to spend a portion of their income on goods and services. This additional spending then generates further income for others, leading to subsequent rounds of consumption. The multiplier effect thus amplifies the initial government expenditure, potentially leading to significant growth in economic activity.

In contrast, other options present different interpretations of the relationship between government spending and the economy. For instance, the statement about always leading to higher taxes does not account for various financing methods available to the government, like borrowing. Saying it has no economic impact overlooks the substantial influence government spending can have, particularly during economic downturns. Additionally, while government spending can influence monetary policy, its primary and more direct effect is through stimulating economic activity via the multiplier effect.