promotion image of download ymail app

When the government runs a budget deficit, all the following happen EXCEPT:?

When the government runs a budget deficit, all the following happen EXCEPT:

the government becomes a borrower in the marked for loanable funds.

the interest rate rises.

the total amount of borrowing decreases.

private investment spending is crowded out.

3 Answers

  • 1 decade ago
    Favorite Answer

    A budget deficit simply means that expenditures exceed income. In macroeconomics, when this question is posed, it is assumed from the standpoint of a previously budget neutral government that had built up neither surplus nor deficit, although neither case would substantially change the answer.

    In order to run a budget deficit, the shortfall (difference between expenditures and income) must be made up somewhere. In lieu of increasing taxes, the government could borrow money from the markets. Such borrowing generally takes the form of Treasury bills, notes and bonds, which are an IOU from the government.

    Increased borrowing is really the same as an increase in the demand for funds; all things equal, when the demand for a product increases, the price of it also increases. As the interest rate is the price of borrowing funds, it is clear how it will move.

    The last two are inter-related. Crowding out means that increases in government spending cause equal decreases in private spending because it raises the cost of funds; the government needs it, private parties decide it's not worth it, and the total amount remains the same. Thus, it is not possible (in this macroeconomic model) for borrowing to decrease because of crowding out.

    And no, a budget deficit does not cause a recession. If anything, a budget surplus, where taxes exceed expenditures and thus money is pulled out of the hands of consumers, would cause a recession.

    • Commenter avatarLogin to reply the answers
  • Pfo
    Lv 7
    1 decade ago

    Not enough information given. Shouldn't this be in politics?

    You don't mention the state of the government, does it have a surplus in its treasury? What do tax rates look like? How much income tax is obtained per year? How is unemployment doing? What does GDP look like and how healthy is it?

    Without knowing that you can't assume that anything will always happen when the government runs a budget deficit. Most governments do run budget deficits all the time, it is totally natural.

    • Commenter avatarLogin to reply the answers
  • 1 decade ago

    we might get a recession. just like the 1930' s .

    • Commenter avatarLogin to reply the answers
Still have questions? Get your answers by asking now.