Budget defecit and economy stimulation current, request, increase, somebody, political

DarienHacker

Hi all,
Reading 23, Govt should increase budget deficit to stimulate economy. Can somebody explain why current govt (UK) is trying to reduce deficit. Obviously, I would request you to refrain from any political views but try to give a rationale for this.
Many thanks

bkballa

bell99 Wrote:
-------------------------------------------------------
> solarpower03 Wrote:
> --------------------------------------------------
> -----
> > Hi all,
> > Reading 23, Govt should increase budget deficit
> to
> > stimulate economy. Can somebody explain why
> > current govt (UK) is trying to reduce deficit.
> > Obviously, I would request you to refrain from
> any
> > political views but try to give a rationale for
> > this.
> > Many thanks
>
>
> I had a big struggle with Reading 23. Later on I
> realised the Macroeconomics from L1 and Balance of
> Payment from L2 are essential to this reading.
> Anyway here is my attempt to your question:
>
> The supply of loanable funds is = PS + (T-G) where
> PS is private savings defined as S + (M-X), T=tax
> revenue and G=govt spending.
>
> An increase in (T-G) translate to a higher amount
> in loanable supply of funds for investments.
> Assuming no change in demand for loanable funds,
> the supply of loanable fund "shifts right" causing
> the real interest rate to decease.
>
>
>
> This in turn encourages less private saving and
> more spending. This in turns increase aggregate
> demand curve which results in an increase GDP.
>
> Not sure whether I make sense....

Uhhh... no you don't.

dyga

solarpower03 Wrote:
-------------------------------------------------------
> Hi all,
> Reading 23, Govt should increase budget deficit to
> stimulate economy. Can somebody explain why
> current govt (UK) is trying to reduce deficit.
> Obviously, I would request you to refrain from any
> political views but try to give a rationale for
> this.
> Many thanks


I had a big struggle with Reading 23. Later on I realised the Macroeconomics from L1 and Balance of Payment from L2 are essential to this reading. Anyway here is my attempt to your question:

The supply of loanable funds is = PS + (T-G) where PS is private savings defined as S + (M-X), T=tax revenue and G=govt spending.

An increase in (T-G) translate to a higher amount in loanable supply of funds for investments. Assuming no change in demand for loanable funds, the supply of loanable fund "shifts right" causing the real interest rate to decease.

[C.f.: Reverse of 'crowding-out' effect]

This in turn encourages less private saving and more spending. This in turns increase aggregate demand curve which results in an increase GDP.

Not sure whether I make sense....

zwjy

Solarpower03, if the economy slows down because of a decrease in budget deficit, it will still have a base to kick-start the economy when global economy picks up especially when the UK economy is highly integrated. Greece ran into trouble when their debt to GDP ratio became overwhelming and thus needed a bailout. That is an economic shock that the UK wants and need to avoid.

Windjammer

Well, as you know, if the government spends more than it gets, it will be in a deficit. But it can only do this by borrowing money. This money needs to be paid back along with interest.

Do you think UK is in a position to increase its debt now? With the rise in interest rates, do you think UK would be in a position to service its debt? How will it generate revenue? By increasing the already high tax rate?