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Government Borrowing: Monetary Theory and Policy - Assignment Example

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A paper "Government Borrowing: Monetary Theory and Policy" reports that the government of Canada recorded net lending and borrowing at -77.61 billion Canadian Dollars. Canadian government projects that net lending and borrowing will be 0.26 billion Canadian Dollar…
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Government Borrowing: Monetary Theory and Policy
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Download file to see previous pages The government borrows majorly through issuing treasury bills, Canada Savings Bonds, and marketable bonds in domestic and foreign markets. The Financial Administration Act dictates that Governor in Council has the mandate to authorize the Minister to borrow money on behalf of Her Majesty in the right of Canada. The government borrowing has been too high and the interest is very low. The government Canada reported net debt of approximately $ 616.9 billion in the fiscal year 2010-11. This was a rise of $ 34.4 billion from 2009-10. Canada’s total government net debt-to-GDP ratio hit 30.4 percent in the year 2010 (Department of Finance of Canada, 2012). This paper will explore the issue of high government borrowing and low-interest rates. It will give economic measures to tackle the problem in Canada. The level of government borrowing is a crucial ingredient of fiscal policy and management of aggregate demand in any economy. When an individual government runs a budget deficit, it implies that in that fiscal year, total government spending exceeds total tax revenue. When a government experiences a deficit in its budget estimates, it has to borrow in order to bridge the gap. This forces the government to issue its debt as Treasury Bills and long-term government bonds through the central bank. The negative effects of the Canadian government’s high borrowing are duplicated in the financial statements of the country. In the 31 March 2011, the Department of Finance of Canada announced that interest-bearing debt was $ 801.8 billion. This was an increase of $ 39.0 billion from the year 2010. Similarly, the un-matured debt was higher by 32.0 Canadian dollars. In addition, liabilities for pension and other benefits for employees went higher by 7.3 billion Canadian dollars. Increase in government borrowing through issuing of bonds such as treasury bills and securities to pay interest in fixed period or indefinitely (Department of Finance of Canada, 2012). Canada has not registered positive results fiscal stimulus. The economic stimulus seems it is not effective. The government borrowing has led to low-interest rates making the government run a budget deficit. In addition, fiscal stimulus has demonstrated inflationary effects that results from high demand. Fiscal stimulus entails the proposition that through borrowing money and spending it, the government can raise the state of the economy. This is through raising inputs and lowering the numbers of jobless. Fiscal stimulus can increase aggregate demand. Theoretically, printing money can be a form of fiscal stimulus. This is because money counts as a transfer payment. People will have a lot of money because of increased printing. However, in practice, people do not just keep many dollars of their extra cash. People will spend the extra amount of money creating demand for services and goods. The increased aggregate demand leads to inflation. This is the state bedeviling Canada. The high borrowing of government seems to create problems rather than to develop the economy in Canada. When the government borrows money from the private sector this corresponds to the increase in spending on its part. However, government borrowing limits the spending of the private sector. This, therefore, implies that job opportunities, which fiscal stimulus seeks to created are offset through a decline in private spending. Canada is grappling with the same situation. ...Download file to see next pagesRead More
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