Income and GDP in the model with government

Abstract

In the modern capitalist economy, the government fulfills three main economic functions. First, through fiscal policy, it influences employment, prices, and the GDP growth rate. With progressive taxation and welfare provision, the government can stabilize the economy through counter-cyclical policy. The government’s activity may expand or contract the market if the government’s expenditure exceeds the demand-depressing effects of taxation so that the resulting budget deficit increases the market. The controversy over the fiscal multiplier. Second, government supplements and corrects the market allocation of resources. A fiscal deficit provides a surplus for the private sector and is easier to organize than a rise in private-sector investment. Third, it can mitigate the degree of income disparities and assure a more socially just distribution by reallocating incomes spontaneously generated in the market economy. The government debt that results from fiscal deficits is really a system of income redistribution. However, the household distribution of income has become more unequal in recent years.