Question

When solving this problem, assume Y=Y*. Focus ONLY on the elements in question.

a) "Due to increased spending, government deficits reach record highs. All else equal, this will reduce growth." Do you agee? Graph the problem on a Loanble Funds Market diagrem, question using a PEN or a PENCIL. upload the photograph of your graph.

i) 0.5 marks will be deducted for each missing label

ii) marks will be deducted for incorrect labels

iii) marks will be deducted for missing exlanations (you may use a formula in your explanations)

iv) simply agreeing, disagreeing or rephrasing the statement carries 0 marks

Answer 1

Rise in government spending will raise supply of loanable funds from S to S1 which will reduce rate of interest in loanable funds market and raise funds available in the market from F0 to F1.

Deficit of government occurs when their spending is more than their tax revenue. It tax revenue does not rises while spending rises, it will cause government deficit to rise which will put extra pressure on economy because government will start raising their tax rate, reduce spending, reducing new investments, making no transfer payments in long run to cover deficits which will surely lower the level of growth of GDP.