When the Federal Government Steps in

Fiscal policy is determined by the federal government on three levels: (1) changing tax structures to maximize revenue collection, (2) regulating government spending based on the pulse of current economic activities and plans for future economic growth, and (3) overseeing/managing the public debt. One recent example of this policy is the Infrastructure Investment and Jobs Act that was passed in November, 2021. The focus of this government spending bill is “… rebuild America’s roads, bridges and rails, expand access to clean drinking water, ensure every American has access to high-speed internet, tackle the climate crisis, advance environmental justice, and invest in communities that have too often been left behind…(as well as) … help ease inflationary pressures and strengthen supply chains by making long overdue improvements for our nation’s ports, airports, rail, and roads …(to) … drive the creation of good-paying union jobs and grow the economy sustainably and equitably so that everyone gets ahead for decades to come.”

The cost of this Act is $1.2 trillion including $550 billion in new government spending dollars for pollution cleanup alongside transportation, water and power infrastructure.  Applying this amount to the expenditure approach of calculating the gross domestic product (GDP), the government spending component or G = +$1.2 trillion. Theoretically, this increase in G will impact the use of resources in the nation that will influence the aggregate demand and aggregate supply of the country in the coming years.

Questions:

1. From the expenditure approach, how do you think the increase in G will affect other components of GDP i.e., changes in C, I, X and/or M? Do explain.
2. What do you think is the effect on the Aggregate Demand, AD curve due to this infusion of nationwide government spending?:
   1. A movement on the AD curve – which direction? Do explain the movement, OR
   1. A shift of the AD curve – which direction? Do explain the shift.
3. For the Aggregate Supply, AS curve, do you think improving roads, bridges and rails  would impact the Short Run Supply Curve or the Long Run Supply Curve? Do explain your choice.
4. Self-reflection: Select your state and comment how this federal spending will impact you, your family and your neighborhood.

Sources:

Pixabay.com: architecture buildings cars city cityscape highway, the Balance:  What is Fiscal Policy?, Whitehouse.gov: Fact Sheet: The Bipartisan Infrastructure Deal, Ballotpedia: Infrastructure Investment and Jobs Act of 2021, Education Animated: The Expenditure Approach (GDP) in 2 minutes , the Balance:  What is Aggregate Demand?, the Balance: Aggregate Supply & How it Works, infrastructurereportcard.org: Benefits to States from the Infrastructure Investment & Jobs Act