GDP ratio

MACROECONOMICS DISCUSSION (NATIONAL DEBT)

 

PLEASE CREATE A THREE SUBSTANTIAL PARAGRAPH RESPONSE FOR EACH PEER, PLEASE INCLUDE GRAPHICS IN EACH RESPONSE.

 

In your responses, comment on at least two posts from your peers by comparing and contrasting your experiences and opinions. Share current news articles or references from the textbook that support your decisions in the simulation and your claims related to the national debt

 

TEXTBOOK TO USE:

 

Mankiw, N. G. (2021). Principles of Economics (9th Ed.). Cengage Learning.

 

 

 

 

PEER 1

 

Jeffrey

The volume of decisions for the simulation was baffling.  I was successful in reducing the debt for both 2032 and 2050.  When I was going through the information, I tried to focus on reducing the defense budget, as well as increasing taxes on the top earners and corporations in the country to levels closer to the average tax rate.  This was done by income taxes increased, as well as reduction in tax breaks.  Throughout the process I also tried to increase spending on education to improve the overall workforce in the country for the future.

In an article from Investopedia, it mentions a study from the World Bank found countries with an excess of debt-to-GDP greater than 77% for longer periods of time resulted in slowing of economic growth. (Kenton, 2022) In review of the information from the simulation, this appears make sense.  If the country has a higher level of debt-to-GDP, there will be less money being invested, which will result in less development for the country.  As the debt number climbs, the eventual slowdown of the economy is definite.  This will result in higher interest rates, less lending, less investment, and higher unemployment.  Another view I found states that “Unlike a person, a government is eternal. For this reason, it is never obliged to pay down its debt; all it must do is to ensure that its debt‐to‐GDP ratio does not grow.” (Leao P., 2013) In my opinion, this still supports the idea that a lower debt ratio is necessary.  While a high debt ratio may not be a negative, it certainly does not allow for additional investment into the country.

The crowding out effect is the opposite of the multiplier effect.  This is crowding-out effect.  This suggests that government spending increasing in the private sector increased the money demand and will also increase aggregate demand.  However, since the interest rate is the expense associated with borrowing, the increased interest rate will also reduce the demand for investment.  This results in the aggregate demand be lower than the raise in money demand would have caused. (Mankiw, 2021)  In short, the increase in government spending caused a decrease in private spending due to a lack an increase of funds remaining liquid and in turn a reduction in loanable funds.

References:

Mankiw, N. G. (2021). Principles of Economics (9th Ed.). Cengage Learning.

PEER 2

 

Ashleigh

 

In the simulation I had the short term fix but long term debt was still high. A strategy I used was seeing what costed the government the most and also fixing thing such as taxes and alcohol and cigarette taxes. It was hard to make some of the decisions because some things cost a lot of money like letting veterans see doctors outside the VA and family vacation which I chose to pay for because I think it is important.

I also think these decisions make high national debt a problem for growth. I think that returns on investments and things like that can help economic growth but the cost may be bigger than the return. If we have to cut things like veterans benefits or government leave then I think eventually that will hurt our economic growth and our people. I couldn’t find an exact ideal debt to GDP ratio but one source did say that “A debt-to-GDP ratio of 60% is quite often noted as a prudential limit for developed countries. This suggests that crossing this limit will threaten fiscal sustainability. For developing and emerging economies, 40% is the suggested debt-to-GDP ratio that should not be breached on a long-term basis (Chowdhury, 2010).”

Crowding out effect is “the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending (Mankiw, 2021).” This is considered a negative result because it raises interest rates and reduced investment spending.

 

 

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