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Oct 22 note - Is a government budget deficit bad for the economy.docx

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Hannah Holmes

Is a government budget deficit bad for the economy? (Ch 8) 22/10/2008 YES - We will use the market for loanable fund to answer this question and we will also look at how we can use market of loanable fund to answer question about interest rate saving and investment in the economy as a whole Review - Government saving have nothing to do with interest rate since they will save if they have a surplus and not save if they don’t have a surplus. Household have a direct relationship with the interest rate. Household decides how much to save depend on the interest Demand - negative relationship between investment and the interest rate Supply - Positive relationship between saving (private) and the interest rate S (saving) R (interest rate) D (investment) Q of LF Shift factors Demand - anything that affects investment (other than the interest rate) Supply - Anything that affects private saving (other than the interest rate) - Anything affects public saving Comparative statics examples In the following cases, use a market diagram to show what happens to the demand and/or supply curves. 1 Is a government budget deficit bad for the economy? (Ch 8) 22/10/2008 What happens to the interest rate, investment, national saving, private saving, and public saving? Example #1 S (saving) R (interest rate) D (investment) Q of LF An improvement in technology causes firms to increase investment in capital goods The intersection of the demand and the supply curve is the national saving which is always equal to investment - Investment = up (shift the demand to the right) - National saving = up - Interest = up - Public saving (T – G) = same
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