Question

28. Irma? Harvey?--We Need to Talk About Infrastructure. Now. Shortly after President Trump took office, bi- partisan hopes were raised of a $1 trillion infra- structure plan that the president said he'd like to see implemented. The hopes have gone. The president's $4.1 trillion budget now proposes spending of $200 billion in infrastructure over the next 10 years. Source: Natural Resources Defense Council, September 8, 2017 a. Explain how $1 trillion of infrastructure spending could be paid for. b. Explain the effects of $1 trillion in infra- structure spending on employment and unemployment.

Answer 1

(a) Government has two sources of financing its spending. First, it can raise tax rates and/or tax base, therefore increasing tax revenue. Second, it can resort to borrowing from market in order to finance the spending. The first options does not increase budget deficit (assuming entire spending is funded by tax revenue), but the second option does.

(b) Increase in infrastructure spending will increase government spending, therefore increasing aggregate demand. The aggregate demand curve will shift to right, therefore increasing price level and increasing output. Since output will increase, employment (labor demand) will increase and unemployment will decrease.