I’ve looked online but I can’t seem to find a clear answer. Thanks
In: Economics
It doesn’t, at least not as you have worded it. To clarify, government *deficit* spending can increase aggregate demand. That’s because while non-deficit government spending simply replaces the spending it removes from the private sector, deficit spending increases the total amount of money being spent *today* by borrowing it from the future.
Think of it like this:
You’re five. You earn $10 with a lemonade stand. If you spend that $10 that’s $10 worth of demand. If your dad “taxes” you $3 and you have $7 left, and you each spend that, you end up with the same $10 worth of demand. If your dad increases his spending without a deficit, he must take more of your money. Say he takes $4, leaving you $6. Together you still have $10 between you.
*But* if you spend your $7 and your dad spends $4 instead of the $3 you gave him, then the total demand is $11, which is more. To do that, your dad had to “borrow” $1 from future you, which may hurt aggregate demand in the future (repaying debt is demand neutral).
A caveat. If you intend to somehow remove your money from productive use – say to bury it in a hole somewhere, then you might be able to make a case that government spending will increase demand because you’re taking your money out of the game, so to speak. This doesn’t go for most forms of savings – banks, stocks, etc – where the money is still used for productive means (investment, loans).
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