Practise evaluating government macroeconomic intervention for inflation, unemployment, growth, external balance, sustainability and distribution through policy conflicts and…
The table gives some economic indicators for four countries.
Which country is closest to achieving the principal aims of government economic policy?
change in GDP
(\%)
rate of inflation
(\%)
unemployment
(\%)
balance of
payments
(\% of GDP)
0.47
0.8
3.4
+3.3
1.13
0.9
10.5
-0.1
1.18
1.1
6.9
-3.3
1.45
0.1
4.6
+8.5
An economy imports a large proportion of its raw materials. Its exchange rate depreciates.
What is the impact on the external and internal value of money?
external value
of money
internal value
of money
rises
rises
rises
falls
falls
rises
falls
falls
Increasing public sector debt is a good policy
Politicians do not usually think it a success to borrow a large amount of money but, in June 2020, when the economy was approaching a recession, the United Kingdom (UK) borrowed five times as much as it did in June 2019. This made the government debt only just a little less than the total size of the economy. The ratio of public sector debt to gross domestic product (GDP) was 99.6%. It was the highest figure for 60 years. Public sector net borrowing is shown in Fig. 1.
Borrowing is what the government ought to be doing in a recession in order to finance the spending used to boost aggregate demand. The question in 2020 was how long could the borrowing of such large amounts continue? There can be problems with a large public sector debt. An expansion of government borrowing might increase interest rates if investors require more compensation because they think the risk of holding government bonds has increased. This interest rate rise would affect the rest of the economy.
There is also a theoretical objection that government borrowing could 'crowd out' the private sector, especially when the economy is close to its productive capacity and unemployment of resources is low. This would not happen when there are unemployed resources in a recession.
The UK Finance Minister suggested that a high ratio of public sector debt to GDP was justified; it is the stability of the ratio that is important. This reasoning can be justified. Reducing government spending in order to reduce borrowing would risk stopping any recovery and make the situation worse. Economic recovery is necessary to restore economic activity, which in turn will restore the government's finances.
However, economists cannot know with any precision what the limits of public sector borrowing should be. For many years, Japan has maintained a ratio of public sector debt to GDP of over 200% with no difficulty. But what is suitable for Japan may not be suitable in a different type of economy.
Consider what is meant by the phrase 'government borrowing could 'crowd out' the private sector.'
Assess whether the evidence in the article makes a conclusive case that the high level of government borrowing is an effective policy.
The inflation rate in a country increased.
Which effect would this most likely have on the country's balance of payments?
an improvement in the current account balance
an increase in price competitiveness
an increase in export revenue
an increase in import expenditure