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Chapter 31: Q.26 (page 762)

Sketch a diagram of how sustained budget deficits cause low economic growth.

Short Answer

Expert verified

Diagrammatically, it are often shown as done below:

Step by step solution

01

Concept Introduction 

The budget balanceis the values of government revenue and spending. When spending is higher than earning, the budger is said to be in deficit. When the earning of the government i higher than expenses incurred, budget is said to be in surplus.

02

Explanation of Solution  

Interest rate is that the rate which is borne by the borrower for the loan taken. within the financial market, the equilibrium will appear on the intersection of demand and provide of economic capital. so as to sustain the deficit, it's needed to force out the private investment by increasing the interest rates.

On the opposite hand, to sustain the deficit, government borrows more of economic capital. This results in rise within the demand of monetary capital.

The horizontal axis shows the number of monetary capital and vertical axis shows the rate of interest. Initially, the equilibrium appears at E0. The demand increases and therefore the curve shifts rightwards from D0 to D1. This ends up in increase within the rate and therefore the quantity of monetary capital. The new equilibrium are E1.

So, now the funds are available and given to the private market at the increased rate of interest. this can be called the crowding out effect of investment.

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Most popular questions from this chapter

In the late 1990s, the U.S. government moved from a budget deficit to a budget surplus and the trade deficit in the U.S. economy grew substantially. Using the national saving and investment identity, what can you say about the direction in which saving and/or investment must have changed in this economy?

The U.S. government has shut down a number of times in recent history. Explain how a government shutdown will affect the variables in the national investment and savings identity. Could the shutdown affect the government budget deficit?

What are some fiscal policies for improving a society鈥檚 human capital?

What must take place for the government to run deficits without any crowding out?

Based on the national saving and investment identity, what are the three ways the macroeconomy might react to greater government budget deficits?
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