Budget deficit occurs when the spending of a government exceeds that of its financial savings. On the other hand, it means the amount of spending exceeds its income over a particular period of time. Why it is important to understand the impact of budget deficit to the economy is related to whether it is harmful to the economy or not. The issue on budget deficit is important because it is with regards to the government policy and decision making. It reflects on how the country’s government spends efficiently as it is highly correlated to the economic growth.
If there is spare capacity (negative output gap), then demand side policies can play a role in increasing economic growth. For example if we decrease interest rates, we will increase the demand in the economy as people have more money as their mortgage costs are decreased. It is the same idea with lowering taxes - this will boost demand, as people have more money to spend as less is taken away from them by the government. Aggregate demand is made up of consumption (consumer spending, Investments Government spending and Exports (minus) imports (Net exports). If anything affects these factors will result in affecting the demand.
In order to close this gap, a government will typically increase their spending which will directly increase the aggregate demand curve (since government spending creates demand for goods and services). At the same time, the government may choose to cut taxes, which will indirectly affect the aggregate
These are designed to increase the level of AD and increase in national income. Lower taxation/higher government spending or lower interest rates will encourage more consumption. The diagram shows an increase in real GDP (economic growth) and a falling output gap. We would expect there to be a fall in unemployment. Therefore two objectives have been met.
Fiscal policy concerns the use of changes in the amount of taxation (T) and government spending (G) to influence the national economy. Changing G will directly affect aggregate demand as AD calculated through the equation AD = C + I + G + (X-M). Not only does fiscal policy affect AD but also aggregate supply, however the affect on AD will be much more immediate whereas AS is affected indirectly over a longer period of time. Monetary policy concerns three main methods of government intervention in an economy; changing the money supply, changing interest rates and the exchange rate. Monetary policy will also indirectly affect AS, as well as directly affecting AD.
More reserves are held in their account at the central bank. With these additional reserves, they can expand credit and create more money. (Bagus 2011) The FED is more passionate than the ECB about cutting interest rates to boost the economy. The ECB main goal is to keep inflation low, while the FED fights a double battle with not only fighting inflation but also unemployment. More things can affect how the ECB reacts when I comes to inflation and mostly targets a broader price index that includes things that doesn’t bother the FEDs as much, such as the Libya-related oil spike in 2011.
If unemployment falls, less people will be claiming unemployment benefits and other similar pay-outs from the government, this will allow a lot of tax to be spent on other things, such as expanding public services further, which also leads to an increase in living standards. Another benefit of economic growth is the increase in confidence, with all these new goods and services on offer to the country, the consumer
Banks have a reserve requirement, which is set by the fed. A reserve requirement is the minimum percentage of a bank’s total reserves that they are required to keep, for security reasons. (Schiller) The fed can change the reserve requirement to allow a bank to loan more/less money, which is used to control the economy. Many critics use this to determine that annual deficit spending has a negative impact on the economic stability of our country. The fed has to set a lower reserve requirement, which allows banks to loan out more money, which generates more interest, which could lead to periods of inflation and could have worse consequences if the government does not react quickly enough.
A higher inventory always means to have some financial capital bounded. To compensate some part of this effect, Rolls-Royce’s operations sets the goal to improve its management of the financial working capital. In order to gain higher responsiveness, Rolls-Royce increased inventory, even this may have on an insulated view a negative impact to the financial performance. However, by increasing
Within this essay, I will be discussing the advantages of this happening as well as the disadvantages that may occur. Furthermore, to understand the question, we must first understand what economic growth is. It is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Firstly, the propensity to consume will increase. This is because the proportion of income spent for the poorer is higher so the redistribution of income will increase consumption and therefore increase aggregate demand.