ABSTRACT
This chapter focuses on the macroeconomic impact of the government on the economy, how it directly affects aggregate demand. It also focuses on the revenue from taxes, especially the federal income taxes and the payroll tax for Social Security. The chapter explains how government spending has changed in a major way since the Great Depression; and how and why government spending usually behaves as it does in a peacetime cycle. It also explains how and why the deficit behaves as it does in a peacetime cycle; the impact of the deficit; and how and why government spending, taxes, and the deficit behave as they do in wartime cycles. The long-run trends mask the significant fluctuations in government revenues and expenditures over the course of business cycles. Government spending is the second-largest element of spending on gross domestic product, so its changes over the cycle are obviously important in determining general economic behavior.
