We have discussed the interrelationship between health per capita and output per capita before midterm. Suppose our focus is now upon quality of government measured by a proxy variable g, which is given by the ratio of productive government expenditure and population. It is observed, in general a rich country can afford to spend more on its citizen in form of government expenditure and a poor country is characterized by limited ability y of its government in terms of spending on its citizens. This is the Income View. Likewise, higher the value of g is, the production sector of the economy is more productive through active involvement of the government in the sector or by means of productive government funding. This is the government view. Following the same methodology we covered in the context of health per capita and output per capita:
i) Draw a well labeled graph showing the interrelationship between y and g in terms of g(y) and y(g) curve in a y-g space. Indicate the point of equilibrium. (2 marks)
ii) Typically, a change in g has a slower impact on y than a change in y on g. Given this, which curve should be steeper? (1 mark).
iii) Suppose the citizens decide to save more leading to higher investment for growth purposes. Show the impact on the equilibrium using a separate graph, by explaining the possible shift(s) of the curve(s). Explain your answer. (1 mark).
iv) Suppose there is a war and the government has to reduce its productive government expenditure, output remaining constant. Show the impact on the equilibrium using a separate graph, by explaining the possible shift(s) of the curve(s). Explain your answer. (1 mark).