Increase in spending for space research

Question

Use the circular flow model to confirm this assertion for $50 million increase in spending for space research?

Answer 1

If this increased government spending were channeled entirely to outside contractors, the effects would be an increase in government expenditures to the product market and an increase in business revenues. To the extent that some (or most) of the spending is “in house,” the government expenditures will be directed to the resource markets.  In both cases, income going to households will increase, which will then increase their consumption, and an increase in the goods and services flowing from businesses.

If government increases net taxes to pay for increased spending, there will be a reallocation of some resources from private business and household products to government products.

The increased government spending will redistribute income mostly toward better-paid labor: scientists, technicians, computer programmers.  It will reduce whatever unemployment exists among the better paid labor.  It will tend to be inflationary since the $50 million paid out for goods and services will go to households without producing output that households could purchase.  (This is always true of defense spending: the military does not produce for sale or have things produced for sale.  But defense spending does create incomes, which are spent.)