A Level Economics AQA Practice Exam

What does government spending refer to?

1. Only infrastructure projects undertaken by the government

2. Goods and services purchased by the government

3. Transfer payments to individuals

4. Investment in private companies by the government

The correct answer is: Goods and services purchased by the government

Government spending encompasses the total expenditure made by government entities on goods and services. This includes everything from salaries for public servants and military expenses to the purchase of equipment for education and healthcare facilities. When explaining this concept, it's important to note that it represents a significant component of overall economic activities, influencing aggregate demand. While infrastructure projects are indeed a part of government spending, they do not encompass the entirety of it; therefore, solely focusing on them does not capture the whole picture. Similarly, transfer payments, such as welfare benefits and pensions, are not considered direct government purchases of goods and services but rather redistribution of money to individuals. Investment in private companies falls outside the typical definition of government spending as it refers to purchasing equity or ownership stakes rather than direct spending on goods and services. Consequently, the most comprehensive and accurate definition of government spending is the acquisition of goods and services by the government, which is captured in the correct answer.