cover the costs of labor and the use of machines and equipment and sells the dresses for a total of $1,500. The value-added tax is paid on this $1,000.Government spending and taxation directly affect the overall performance of the economy. For example, if the government increases spending to build a new highway, construction of the highway will create jobs. Jobs create income that people spend on purchases, and the economy tends to grow. The opposite happens when the government increases taxes. Households and businesses have less of their income to spend, they purchase fewer goods, and the economy tends to shrink. A government's fiscal policy is the way the government spends and taxes to influence the performance of the economy.When the government spends more than it receives, it runs a deficit. Governments finance deficits by borrowing money. Deficit spendingthat is, spending funds obtained by borrowing instead of taxationcan be helpful for the economy. For example, when unemployment is high, the government can undertake projects that use workers who would otherwise be idle. The economy will then expand because more money is being pumped into it. However, deficit spending also can harm the economy. When unemployment is low, a deficit may result in rising prices, or inflation. The additional government spending creates more competition for scarce workers and resources and this inflates wages and prices.The total of all federal government deficits forms the national debt. The size of the U.S. national debt has grown during the 20th century. The debt equaled about $25 billion in 1919 after World War I and about $260 billion in 1945 after World War II. In 1970 the debt stood at about $380 billion. Ten years later, the national debt had soared to nearly $1 trillion. In 2000 the national debt totaled $5.7 trillion.Many people are concerned about the size of the U.S. national debt. They fear that a large amount of debt harms the economy and ...
