5.) The following quotation is from Bloomberg. Com and is in turn based on extra

Question

5.) The following quotation is from Bloomberg. Com and is in turn based on extracts from a paper by Michael Spence, Is the approach to budget deficits briefly outlined here more “Keynesian,” more “Crowding Out” or more “Supply Side” in tone?

Michael Spence: Many governments nowadays are accumulating debt in order to buttress public or private consumption. This approach, if overused, can amount to borrowing future demand; in that case, it is clearly unsustainable. But, if used as a transitional measure to help jump-start an economy or to provide a buffer from negative demand shocks, such efforts can be highly beneficial…. In an environment of low long-term interest rates and deficient short-term aggregate demand (which means there is little risk of crowding out the private sector), it is a mistake not to relax fiscal constraints for investment. In fact, the right kind of public investment would probably spur more private-sector investment. Identifying such investment is where today’s debt debate should be.

Explanation / Answer

This approach is Keynesian in tone. It emphasies on the capability of government spending increasing the purchasing power in the hands of general public. This would increase demand for consumption in the economy and thus increase production pace. According to Keynesian approach in times of underproduction in the economy i.e. when the economy is operating at less then its full production capacity government deficit does not crowd out private investment. And this is what Michael Spence is outlining.

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.