4. Impact of budget deficits The following graph shows the demand for loanable f
ID: 1122925 • Letter: 4
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4. Impact of budget deficits The following graph shows the demand for loanable funds and the supply of loanable funds in the United States. At the current equilibrium, the government is experiencing a balanced budget. Assume that the U.S. government bails out several troubled banks without increasing taxes, creatinga budget deficit. Show the effect of the budget deficit on the market for loanable funds by shifting the demand (D) curve, the supply (S) curve, or both. LOANABLE FUNDS Based on this model, the budget deficit leads to in the level of investment and in the interest rate Which of the following arguments might an advocate of a balanced budget make in support of his position? Check all that apply nBudget deficits increase natlonal saving n Budget deficits place a burden on future taxpayers. n A decrease in spending today, such as funding cuts in education, may hurt future generations more. n Budget deficits decrease national saving Proponents of a balanced budget argue that the government's budget deficit cannot grow forever, but critics belileve that this is not necessarily the case. They argue that what matters is the size of the debt relative to the nation's income For example, suppose that real output in the United States grows at approximately 3%. If the inflation rate is 2% per year, this means that nominal income must be growing at a rate of also rises. Therefore, as long as the nation's income grows harming the economy. In this case, the nominal government debt can rise by % per year. Because nominal income grows over time, the nation's ability to pay back the national debt than the government debt, the level of debt can continue to increase without - % each year without increasing the debt-to-income ratioExplanation / Answer
Answer:
It is problem on loanable fund. Investors creates its demand. Savers supply it. Interest rate governs them. Increase in interest will make loan taking more costly. So demand will rise. It will shift demand curve to the right. Then point of intersection will shift to the right. It will increase interest rate.
Answer: Based on this model, Budget deficit leads to Increase in the levels of investment and increase in interest rate
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Bailout plan for automobile industry has been taken, without increase in tax. So income of government will not rise. But expenditure will move up. Reslt is budget deficit. A balance budget requires equality of income and expediture.
Budget deficit may nor decrease national income. In developing and poor economy deficit budget is needed. In those economy savings are not adequate for satisfying liquidity requirements of the economy. So government spends money to improve ifrasctrural facilities and invests in other required areas. It will create a cojenial evironment for the growth of the economy. Thus private investment increases. National income expands. Economy gradually moves to wards betterment.
Discussions of above para also makes it clear that Budget deficit does not crowde out private investment. Rather it improves facilities to make more private investments for the betterment of the economy.
It is true that contiuous budget deficit increases a burden on future tax payers. If growth in GDP fails to meet up loans caused from budget deficit, future burden will grow. Tax payers have to bear its adverse effect. More taxes will be imposed on them to correct the situation.
Deficit budgeting does not mean cut in investment fund for vital sectors like education. Rather more than revenue earned is expended for welfare activities. So the last statement is also not true.
Thus argument of burden on future taxpayers is correct in favor of balanced budget.
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Budeget deficit cannot grow for ever. It should invest effectively, so that GDP can grow to the desired extent and can help the economy to rediuce the deficit in future. Success lies in effective use of investment made in improving GDP.
For example, suppose the real output in the Uited States grows at approximately 3%. If the inflation rate is 2% per year, this means that nominal income must be growing at a rate of 5% per year. Because nominal income grows over time, the nation's ablity to pay back the national debt also rises. Therefore, as long as the nation's Income grows more than the government debt, the level of debt can continue to increase without harming the economy. In this case, the nominal government debt can rise by less than 5% each year without increasing the debt to income ratio.
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