Something to think about !! -> MacroEconomics Problem

Bex2

Any answers for this one either???!

In 2009, Ireland's nominal GDP will fall significantly, and the interest rate at which the Government can borrow to finance a fiscal deficit is positive.

What does this imply about the sustainability of fiscal policy?

We're ****ed.

Économiste Monétaire

How about if you write up an answer and we'll see where there's room for improvement?

Bex2

Draft Answer:

With a government fiscal deficit come many different effects on all aspects of an economy. Increasing taxes give the government an increase in revenue but put more pressure on the public domain with unemployment escalating and wage cuts becoming ever more prominent. Although these tax increases will increase government revenue, public spending will become reduced and hence a drop in revenue. The amount by which revenue will rise of fall will depend on how the market reacts to the tax changes and of course the drop in government spending. Even if tax increases are very much needed to feed the government debt more will have to be done to help Ireland’s economy back to normality.

Nominal GDP will fall further due to any decrease in government and public expenditure. With wage cuts people will find the price of goods and services to be more expensive although they are now slowly decreasing. Due to the high interest rates being imposed on government borrowings, which will lead to borrowing as little as possible, government expenditure will decrease. Yet with more unemployment in the economy we find rising numbers claiming social welfare payments which forces the government to spend money.

In both fields, Revenue and Expenditure, we can see that fiscal policy is at a standstill. Neither can be drastically changed which means there is very little movement in the economy and the sustainability of fiscal policy looks bleak. To maintain a fiscal policy the country will need to look to external markets to have a positive effect on the economy due to the fact that Ireland does not have an internal market of sufficient scale to sustain itself domestically. This is also why entrepreneurial endeavours will need to be encouraged in order to sustain and boost the Irish economy back to normality.

Suggestions for improvement??

Hasschu

Presently the gov't has bet and continues to bet the farm on bailing out the banks. We are way in over our heads in debt both public and private. I have no worries about private debt as corportations and private citizens will do the rational thing with few exceptions. The gov't is now beyond redemption and getting sucked in deeper and deeper by the day. Our salvation may be that the appetite for Irish gov't bonds will be quite limited. This will be reflected in the interest rate which may zoom to 5 to 7% higher than Germany pays on its bonds and indeed there could be bond auction failures and private placement failures. Reality has a habit of intruding at the most inopportune time.

Bex2

Draft Answer:

With a government fiscal deficit come many different effects on all aspects of an economy. Increasing taxes give the government an increase in revenue but put more pressure on the public domain with unemployment escalating and wage cuts becoming ever more prominent. Although these tax increases will increase government revenue, public spending will become reduced and hence a drop in revenue. The amount by which revenue will rise of fall will depend on how the market reacts to the tax changes and of course the drop in government spending. Even if tax increases are very much needed to feed the government debt more will have to be done to help Ireland’s economy back to normality.

Nominal GDP will fall further due to any decrease in government and public expenditure. With wage cuts people will find the price of goods and services to be more expensive although they are now slowly decreasing. Due to the high interest rates being imposed on government borrowings, which will lead to borrowing as little as possible, government expenditure will decrease. Yet with more unemployment in the economy we find rising numbers claiming social welfare payments which forces the government to spend money.

In both fields, Revenue and Expenditure, we can see that fiscal policy is at a standstill. Neither can be drastically changed which means there is very little movement in the economy and the sustainability of fiscal policy looks bleak. To maintain a fiscal policy the country will need to look to external markets to have a positive effect on the economy due to the fact that Ireland does not have an internal market of sufficient scale to sustain itself domestically. This is also why entrepreneurial endeavours will need to be encouraged in order to sustain and boost the Irish economy back to normality.

Suggestions for improvement??

Économiste Monétaire

Where's the maths? Mankiw's intermediate macro, chapter 15. I believe you were shown his simple model of government debt and deficits—use it.