Macroeconomics
Government borrowing is too high and interest rates are too low in many countries; fiscal stimulus does not work and cheap money leads only to inflation. Explain and discuss the various caveats of this macroeconomic problem and what policy measures will you suggest and Why if you are hired as a Junior Policy Advisor in an Advisory Board of Economists in one such country including Canada? Use economic theory, policy, and data to illustrate and validate your answer.
Government borrowing is the money or debt under the jurisdiction of the country. Government borrowing represents the money belonging to the public owed by the central bank of the country's economy. The main source of government funds is tax from the citizens of the country. This makes government debt or borrowing to be an indirect debt of the citizens. In some economic terms, government borrowing refers to public or national debt. In the current states of economies, public debt is on the rise in most nations. The ways through which government borrows from the public include bonds, securities, and bills. Interest rates refers to the interest amount which the borrower accompanies the debt payment. It also refers to the rate at which central banks and commercial banks are willing and able to lend financial items to individuals or companies. The interest rates are extremely low hence reducing the total revenue collection by the government. Government debt and interest rates are crucial items in the macroeconomics analysis of the public economy.
Discussion
Increase in the government debt exerts extra burden on the taxpayers. The government debt of Canada as an example in context is approximately $543,022,147,241.02 (Country Intelligence, 2012). This compares to the countries experiencing enormous governmental debts. In such cases, the government has no option to raise enough funds to repay the debt. This causes the burden to fall on the citizens who would...
The taxation increase can be in the form of increment in the commodity prices or inflation. One of the main consequences of government debt is an increase in the prices or inflation. Consumers pay more for similar quantity of products than the previous financial year. Inflation robs the consumers of their potential real income hence decrease in the economic power of the society. With the increase on the public debt or national debt, the country faces financial challenges in which they cannot borrow effectively and efficiently from international monetary bodies.
The problem that might arise because of increase in the public debt while other factors remain constant is the decline in the strength of the nations' currency. There is a high probability that the country with high rates of public debt would lose some of the value of its currency in the international market. With lower currency values, there exists imbalance in terms of trade. The exports from the country in context become cheaper to potential buyers in the international market. The imports crucial to the needs of the country become much expensive hence imbalance of exports and imports of the nation. Government debt also has the tendency to raise interest rates. The aim by the central bank in increasing the interest rates is to reduce the level of the financial burden or national debt. However, this economical phenomenon does not usually apply in all economies. For instance, the government debt of Canada is on the increase while the interest rate is unusually low (Midthjell, 2011)
Lower interest rates have the capacity to shift the interest of potential investors from securities and bonds. This is because of fear to make losses in the form of low return on investment. The investors get little profits for their investments hence they shy from investing in bonds and security market. This scenario limit the amount of revenue the nation can accumulate…
