Budget deficit

[gameday0]

Hello!

Hope studies are going well! I don't understand in the econ book why a budget deficit RAISES interest rates and lowers private investment because of crowding out. Actually I don't even understand what crowding out means so if n e one can help me that would be great. Thank you!

 

[supersharpshooter]

http://www.analystforum.com/phorums/read.php?11,760899,761042



Edited 1 time(s). Last edit at Thursday, June 5, 2008 at 01:04AM by supersharpshooter.

 

[daj224]

gameday0 Wrote:
-------------------------------------------------------
> Hello!
>
> Hope studies are going well! I don't understand
> in the econ book why a budget deficit RAISES
> interest rates and lowers private investment
> because of crowding out. Actually I don't even
> understand what crowding out means so if n e one
> can help me that would be great. Thank you!


this is basic stuff. deficit = exp > tax revs, prices get out of control, Fed has to raise rates.

higher rates mean Joe Six pack will not borrow this yr to buy a Dell for his niece, so private investment is CROWDED out

boom, bring em on, i got 1000 pages to read and red bull to last me to the armagedon

 

[AudreyMwala]

look at it as demand and supply. when Govt is in deficit its demad for money is high. when demand is high prices increase ( interest in this case i.e. cost of capital). high interest will make it expensive for the private sector to borrow and use the expensively borrowed money for investments that will eventually be profitable. because borrowing is expensive, private sectpr would rather not borrow, and would rather not invest.

in addition, if govt is borrowing too much, there may eventually be less capital left in the maket for private sector borrowing. they have to que for them to access capital.