Which transaction would be included in government spending (G)?

Question

BlackTom AI · Accepted Answer

First, examine what government spending (G) includes in macroeconomic terms: G consists of government expenditures on goods and services that directly absorb resources, such as building highways, paying salaries of government workers, and purchasing equipment. It does not include transfer payments, which are payments to individuals (like benefits) that do not fund a current production of goods or services.

Option a: Social Security payments to retirees. These are transfer payments. They do not fund the purchase of goods or services by the government and thus are not counted as government spending (G). They simply redistribute income to individuals, leaving overall GDP calculations to show consumption through recipients’ spending, not government purchases.

Option b: Construction of a new highway. This is a direct purchase of a public good that requires government resources (labor, materials) and results in a tangible service (infrastructure). This fits the definition of government spending (G) because it adds to government purchases of goods and services.

Option c: Unemployment benefits. Like Social Security, unemployment benefits are transfer payments to individuals to support income during unemployment, not a direct purchase of goods or services by the government. Therefore, they are not counted as G.

Option d: Interest payments on government debt. These are payments made to creditors and do not correspond to the purchase of goods or services in the current period. They are typically categorized separately (often as part of the government’s interest obligations) and do not constitute spending on goods and services, so they are not included in G.

In summary, the only option that aligns with the concept of government spending on goods and services is the construction of a new highway, while the others are transfer payments or financial obligations that do not constitute G.

Which transaction would be included in government spending (G)?

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