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ECONOMICS Chapter Notes - Chapter CHAPTER 1: Deflation, Social Capital, Transparency International

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partwi085
9 Dec 2021
School
Mahatma Gandhi University - Kerala
Department
Humanities
Course
ECONOMICS
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Document Summary

Fiscal deficit is the excess of expenditure (both on revenue and capital accounts) over revenue receipts and only non-debt type capital receipts such as recoveries of loans. Fiscal deficit = (total expenditure both on revenue account and capital. Account) - {revenue receipts + non-debt capital receipts) Fiscal deficit is a more comprehensive measure of budgetary imbalances. Thus, when the government"s total expenditure, both revenue and capital expenditure, exceeds its revenue from taxes and other normal receipts, fiscal deficit is created. Now, this fiscal deficit can be financed in two ways. Firstly, through borrowing by the government from the market, both inside and outside the country. On this borrowing, the government has to pay rate of interest annually. Apart from that it has to pay back the internal and external debt taken. Secondly, the government can finance the fiscal deficit by borrowing from the reserve bank of india which issue new notes against government securities.

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Related Questions

A recent report on GDP growth rates showed that the GDP of Dorada, a developed economy, has declined by 1.5 percent this year. Emily George and her friend Tabitha Jude, both students of economics, are discussing the possible reasons for the decline in the growth rate. Emily feels that the government deficit has reached an unsustainable level, as a result of which interest rates now are extremely high. This has reduced government expenditure in recent times, leading to a decline in GDP. Tabitha however disagrees. According to her, the fall in GDP must imply a fall in consumer spending as household consumption accounts for the largest share in Dorada's GDP. Which of the following, if true, will strengthen Emily's claim that the high fiscal deficit is affecting the government's ability to spend?

A. The central government's grants-in-aid to the local governments increased by 7 percent.

B. A sizeable portion of the tax revenue generated in Dorada is being used to make interest payments on sovereign debt.

C. The President's economic advisory council is of the opinion that the fiscal deficit should not exceed 3 percent of the country's GDP.

D. Given that the government of Dorada has never defaulted on sovereign debt, it enjoys very high credit ratings.

E. The government of Dorada scaled up its defense expenditure by more than 50 percent in the last two years.

The head of a major think-tank states that America’s fiscal deficits can be accurately characterized as a deficit due to rising health care costs in the economy. Explain what the above statement means from what you know about the sources of rising government costs/expenditures and rising deficits in the future.

One of the concerns about government running an increasing fiscal deficit (e.g., by increasing spending) is that it exposes the economy to a rising current account deficit – the “twin deficit” story. Explain.