MYTUTOR SUBJECT ANSWERS

440 views

What are the likely impacts of a sustained budget deficit for an economy?

Interest rates on bonds increase, leading tp increased costs of borrowing. Leads to

a) fall in business investment, which reduces both AD and LRAS (i.e fall in economic growth)

b) structural instability as a result of a) 

c) goverment has to increase spending if it wants to maintain the same level of stimulation that government spending has on the economy. If it doesn't, government spending falls in real terms. (thus fall in AD).

d) Due to falling economic growth, unemployment rises. May lead to a vicious cycle of increased welfare payments, which in turn leads to a prolonged deficit, and then more welfare payments.

e) LRAS shifts to the left as said in part a). Thus inflation increases in the longer run.

A few contingent variables

1) The size of this sustained deficit. Is it 1% of GDP, or 20%?

2) The length of the sustained deficit.

3) The global economy. Say, if other economies are also in a period of sustained deficit, then interest rates on bonds may rise simulatenously and investors may not invest elsewhere since it's just as expensive to borrow, leading to no negative impacts on AD.

4) The level of govt spending as a percentage of GDP.

5) Causes of this sustained deficit. Is it in the aftermath of, say, a financial crisis and may be solved when the crisis is over, or is it a more structural issue?

Chuen Him K. A Level Economics tutor, A Level Maths tutor, GCSE Maths...

1 year ago

Answered by Chuen Him, an A Level Economics tutor with MyTutor


Still stuck? Get one-to-one help from a personally interviewed subject specialist

64 SUBJECT SPECIALISTS

£20 /hr

Shona S.

Degree: Economics (Bachelors) - Birmingham University

Subjects offered:Economics, Maths+ 1 more

Economics
Maths
Biology

“I am a second year Economics student, studying at University of Birmingham. At school I studied Economics, Maths and Biology for A levels and having enjoyed learning them, so I feel I will be able to enthusiastically teach these subje...”

£22 /hr

Anahita G.

Degree: Maths and Economics (Bachelors) - York University

Subjects offered:Economics, Science+ 3 more

Economics
Science
Maths
Chemistry
.TSA. Oxford.

“I am a maths and economics student at the University of York. I have always loved logical and analytical subjects, for example Maths and the Sciences. I also particularly enjoy economics as there are countless ways to analyse and conc...”

£24 /hr

David L.

Degree: Economics (Bachelors) - LSE University

Subjects offered:Economics, Music+ 4 more

Economics
Music
Maths
Extended Project Qualification
English
-Personal Statements-

“I am a currently a student studying BSc Economics at the London School of Economics. I have had an exemplar academic record, achieving two A*s and three As at A-Level in Maths, Further Maths, Economics, Music and EPQ; and the equivale...”

About the author

£20 /hr

Chuen Him K.

Degree: Philosophy and Politics (Bachelors) - Edinburgh University

Subjects offered:Economics, Maths

Economics
Maths

“Top tutor from the renowned Russell university group, ready to help you improve your grades.”

MyTutor guarantee

You may also like...

Other A Level Economics questions

What is price discrimination?

Why do markets fail?

How can the Government improve economic growth/real GDP of a country?

Why is supply side policy used a lot in modern economies?

View A Level Economics tutors

We use cookies to improve your site experience. By continuing to use this website, we'll assume that you're OK with this. Dismiss

mtw:mercury1:status:ok