Readers Question: To what extent are higher government debt levels a constraint on economic growth? There has been much debate about the extent to which high levels of government debt might slow down rates of economic growth. In particular, a 2010 paper “Growth in a Time of Debt,” by Carmen Reinhart and Kenneth Rogoff seemed …
“Nothing is so permanent as a temporary government program.” Milton Friedman, “Tyranny of the Status Quo,” (1984) p. 115 Friedman was a free-market economist critical of government intervention. With this quote, he was making the point that government intervention can invariably lead to government failure and inefficient use of resources. One example, Friedman used was …
What are the problems of high government borrowing? The potential problems of government borrowing include; higher debt interest payments, a need to raise taxes in the future, crowding out of the private sector and – in some cases – inflationary pressures. Potential problems of high government borrowing Higher debt interest payments. As borrowing increases, the …
Increased government spending is likely to cause a rise in aggregate demand (AD). This can lead to higher growth in the short-term. It can also potentially lead to inflation. Higher government spending will also have an impact on the supply-side of the economy – depending on which area of government spending is increased. If spending …
Government price controls are situations where the government sets prices for particular goods and services. Types of price controls Minimum prices – Prices can’t be set lower (but can be set above) Maximum price – Limit to how much prices can be raised (e.g. market rent) Buffer stocks – Where government keep prices within a certain …
One of the first lessons in economics is the idea of opportunity cost. If you pursue one choice, it means you can’t do another option. The government faces countless decisions based on this. For example, the government could spend more on health care, but the opportunity cost would be lower spending on education. We could …
Readers Question: The Labour party, among others, protests about the effects of government austerity policies on ordinary people but does government spending, even so-called ‘investment in infrastructure’, not automatically increase national debt which means punishing future generations? Firstly, if a government increases spending without any corresponding increase in taxes, then this change in the government’s …
Readers Question: Why does the government borrow? Essentially, the government borrows so that it can enable higher spending without having to increase taxes. The annual amount the government borrows is known as the budget deficit. The total amount the government has borrowed is known as the national debt or public sector debt. There are many …