Question

Summarize the article sharing your thoughts on the recession and what impact it has had. Discuss how a government budget surplus or deficit influences the loanable funds market. Analyze the implication of an added consumer debt in the loanable funds market. Explain the crowding out effect and it’s role in the economy.

Answer 1

Recession refers to the business cycle contraction in the economy when the overall economic activity including trade and industrial activity declines in the economy. The macro economic indicators like national output, inflation rate, investment spending, profits etc fall in the economy while unemployment rate increases in the economy. Recession leads to fall in the overall economic activity in the economy and fall in aggregate demand and thus reduces the GDP growth rate in the economy.

If the government is running a budget deficit , then overall government savings decline and decline in national savings leads to increase in rate of interest in the economy and budget surplus increases national savings and thus reduces rate of interest in the economy. If there is added consumer debt in the loanable fund market, then interest rate will increase further in the economy due to increase in demand for loanable funds.

Crowding out refers to the fall in the private investment spending in the economy due to budget deficit of the government. When the government is running into deficit, then it will demand borrowings from private market, thus increasing the demand for loanable funds which leads to increase in the rate of interest in the economy and thus reduces private investment spending in the economy. Crowding out leads to fall in the overall aggregate demand in the economy and thus reduces national output and growth rate in the economy.