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Changes In The Level Of People's Disposable Income

How do changes in disposable income affect government purchases and the government purchase function?

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The relationship between the two is somewhat indirect. If people have smaller disposable incomes, they will spend less money, reducing the amount of revenue raised through sales taxes. This has the greatest effects at the regional levels of government which rely mainly on sales and property taxes for revenue, unlike the federal government which is more reliant on other forms of taxation. This means that lower disposable income can reduce both local government revenue and expenditures. This means less money is available for spending on infrastructure and public services. Lack of consumer spending and reduced government spending can in combination lead to recession or economic contraction. 

To counter this, the government can engage in increased spending on things like infrastructure and public services to counter the deflationary spiral. Many economists think that increasing government purchasing, especially in the form of investment in infrastructure, is the best way to counter...

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