Questions 1Why do you think advanced economies were able to

Questions:

1.Why do you think advanced economies were able to increase debt during the financial crisis while developing economies actually saw their debt decline?

2.How does general government debt differ from public government debt?

3.Since there is a positive relationship between government spending and GDP, the government should always engage in expansionary policy. Respond...

4.Explain the relationship between a change in government spending and a change in GDP?

Solution

1. Advanced economies saw their debt increasing because in order to keep the same high standards of living, the govt. would have had to spend equal or even more amount of money. This meant that even the govt. expenditure never reduced, its revenues certainly did reduce and thus caused increasing debts. On the other hand, the developing economies had cut down on its expenditure because its people did not expect its govt. to provide a certain level of public service, as was the case in the Developed Economies. And hence, cutting down on spending along with encouraging people to save more meant that Developing Economies saw its deficits reducing during the crises.

2. A general government debt might not be traded in public. For example bank to bank lending. Whereas, public government debt means that this debt has been raised by issuing some Government approved Treasury Bills.

3, No, the government should not always engage in expansionary policy because as the Government spends more, it also could lead to excessive inflation, which could affect the real incomes of an individual, and thereby discouraging him to work for longer hours.

4. The change in government spending and change in GDP can have both negative and positive correlation. An increase in Government spending might increase GDP, whereas it might also decrease GDP as has been explained in the previous answer.