A recent study has revealed that the unemployment rate in Eduland has been increasing over the last few years. What will be the impact of an increase in government spending in Eduland?

What will be an ideal response?

The government's extra expenditure might encourage additional business activity in Eduland, which would raise employment and take-home pay, and thereby increase household consumption. However, there is also a negative side to government expenditure. Rising government expenditures might lead to more government borrowing, and such borrowing can soak up resources that would otherwise have been used by households and firms. Some economists believe that rising government expenditure "crowds out" private economic activity like consumption and investment. Crowding out occurs when rising government expenditure partially or even fully displaces expenditures by households and firms. If the increase in government expenditure fully crowds out private investment, there will be no improvement in the unemployment rate in Eduland due to increased government spending.