Canadian Securities Course (CSC) Level 1 Practice Exam

How does government spending impact the economy?

1. It has no effect on the economy

2. It reduces economic activity during periods of low inflation

3. It can stimulate the economy during periods of economic downturn

4. It leads to increased inflation rates

The correct answer is: It can stimulate the economy during periods of economic downturn

Government spending can stimulate the economy during periods of economic downturn. When an economy is facing challenges such as high unemployment or low consumer spending, increased government expenditure can help to boost demand by providing jobs, increasing income, and enhancing consumption. This injection of funds into the economy can also lead to improvements in infrastructure and public services, which can have a long-term positive impact on economic growth. Additionally, during recessions, consumer confidence and spending typically decline. Government spending acts as a counter-cyclical measure, helping to offset the decrease in private sector spending. By investing in areas like public works or social programs, the government can stimulate economic activity and encourage recovery. In contrast, other options suggest that government spending has no effect or may hinder the economy, which overlooks the important role it plays in fiscal policy aimed at stabilizing economic fluctuations.