Essay Plans

How might Government capital spending affect private sector investment?

POINTS:

Capital spending = injection
Multiplier effect
Diagram - deflationary gap
Accelerator
BUT - crowds out private sector investment. If capital spending is financed by borrowing this will lead to an increase in the money supply if financed through the banking sector or an increase in interest rates if financed through other sectors. This rise is necessary to persuade other sectors to hold government debt but the effect of higher interest rates is to discourage private sector investment.
Quote current government spending and the purpose.
Stress the role of confidence in investment.