Government Purchases Function

tion Completion Status: Question 1 Explain what would cause the government purchases function to increase. Will a change in social security spending affect government purchases? Answer:When government starts spending more on infrastructure and value creation such as; building roads, installing street lights, building communication network etc. we would see increase in the government purchase function. Social security spending generally has negative impact on government purchases. Because of scarcity of funds, a government faces dilemma between social security spending and spending on government purchases i.e. if government wants to increase social security spending, then it will have to cut its expenditure on government purchases. Question 2 What is a consumption function? Describe the graph of a consumption function and explain its shape. If total spending is consumption plus investment spending, how does an increase in the interest rate affect total spending? Answer:Consumption function explains the relationship between consumption expenditure and factors affecting consumption. The most important factor affecting consumption is income of the household. A household having higher income will spend more on consumption than a household with low level of income i.e. consumption expenditure rises with increase in income level.We note that the consumption function is upward sloping, implying