Government borrowing, government budgets and fiscal policy impact - Assignment Example

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Budget deficits occur when the government spends more than its resources. Trade deficit is when a country tends to import more than its exports its goods and services. Both this budgets can be seen as interlinked through the theory of twin deficits in that when the government…
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Government borrowing, government budgets and fiscal policy impact
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Government borrowing, government budgets and fiscal policy impact. al Affiliation Budget deficits occur whenthe government spends more than its resources. Trade deficit is when a country tends to import more than its exports its goods and services. Both this budgets can be seen as interlinked through the theory of twin deficits in that when the government ends up by cutting on the amount of tax it charges, people will tend to increase their rate of spending hence allowing them to buy more imported goods and service, hence increasing the rate at which the government borrows funds from financial institutions in other countries as to avail money for its citizens’ expenditure (Lavoie, 2014).
2. The government often increases its spending to expand an economy. In this situation, the actual deficit for the year is less than the forecasted amount. This shows that the government spending was less than expected; however, the revenue was more than the forecasted value. This indicates a surplus in the budget, and this implies faster economic growth. Yes, this is a problem in trying to balance the budget as the forecasted amounts vary widely with the actual expenditure and revenues.
3. Poor economic growth resulting in things such as unemployment could be caused by contraction of the country’s economy this can be corrected by the putting an expansionary fiscal policy in place. This system enables the government to increase the amount of money being transmitted in the country by cutting on state taxes, increasing the amount of government expenditure while the central bank is regulating by increasing the amount of money being supplied in the country. This helps in increasing production while creating more jobs. Expansion of a business cycle creates inflation in the country. A contractionary fiscal policy seeks to attend to this problem by trying to decrease the amount of money spent by the government while increasing the amount of interest rates on loans offered as to discourage people from borrowing hence reducing the amount of money in supply in the country.
4. Crowding out effect is whereby there is shrinkage in the private sector economy due to an apparent increase in government interest rates. There will be a less crowding out effect if the government spending is reduced as this will see a decrease in interest rates and higher investments in the private sector.
5. When Marginal taxes are cut off by the government, people tend to spend more on buying of products as they seem to have more money to spend. While they spend more on marketing, the government tends to collect more money from taxes.
Lavoie, M. (2014). Post-Keynesian Economics: New Foundations. Edward Elgar Publishing. Read More
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