Question

Some economists argue that if the economy currently needs to be stimulated to remove it from a recessionary gap, how government spends more money (on X or Y) matters less than the fact that it does spend more money. Do all economists agree? If not, what do they say in response?

Short answer

No, not all economists agree. While some argue that what's important is that the government is spending money to stimulate the economy, others believe that the effectiveness of government spending relies heavily on what it is spent on. Some economists would even argue for different economic policies altogether.

Step-by-step solution

Understand the Key Terms

A recessionary gap, or contractionary gap, occurs when a country's real GDP is lower than its potential GDP at full employment. Government expenditure in this context refers to the total amount of money that a government spends within the fiscal year. It includes spending on goods and services, investments, and transfer payments.

Understand the Provided Argument

Here, the argument is that in a recessionary gap situation, the mere act of government spending is what's important, regardless of where the money is spent. This is based on the concept of the fiscal multiplier effect, where government expenditure increase income and hence consumption, contributing to a cycle that stimulates the economy.

Formulate a Counterargument

Not all economists will agree with the above-mentioned position. Some would argue that the effectiveness of government spending relies heavily on what it is spent on. For example, spending on infrastructure, education, or health can have different effects on short-term demand and long-term growth. Moreover, other economists might argue for different economic policies altogether, like reliance on monetary policy or supply-side policies.