2. When the government borrows from the private sector, in that case banks, it literally sells bonds to the banks in return for money. The money that the government receives from the banks is now unavailable for the citizens and investors looking to receive money from the banks – money has gotten more scarce. That way, the government is taking money from the bank that otherwise citizens could borrow and will only return it after a while.

3. According to the predictions of the CBO, the fiscal stimulus will lead either way to an increased growth in the short-run. But, because of the crowding-out effect there is a danger of the fiscal stimulus to lead to a decreased growth (or recession) in the long-run. There are multiple ways to try to make sure that the fiscal stimulus will also lead to an increased growth in the long-run or at least not decrease growth in the long-run. Those ways would be investing in long-run growth potentials; for example: better education (e.g. subsidized studies), better social security and public health care, higher productivity (e.g. invest in technological research)

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In crowding out government needs to borrow by selling government bond; it is just like competing with private firms. So that interest rates will increase. When interest rates increase then the rate of investment of private firms will decrease, as they will not want to invest money with higher interest rates. That’s why the AD and AS will all decrease.

2.Discuss the following statement: “In order to finance its budget deficit, the US government must borrow from the private sector.” How does the government borrow from the American people?

The government sells bonds with interest rates and then it pays back the money and the interest to the public.

3.Will fiscal stimulus in the short-run lead to increased growth or decreased growth in the long-run? Discuss.

If fiscal stimulus isn’t much, then it is something good for economic growth as it affects productive side of people. However, if the fiscal stimulus is more than it should be, it will cause crowding out which is like competing with private sector as a government. Interest rates will increase as it is stated in the first question then production rate will decrease. That’s why economic growth will also decrease.

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No, Crowding-out is not a big problem during a recession because the government always wants to increase the aggregate demand since it’s a recession. People will therefore gain the money and most likely save it and not spend it on goods and services. The GDP , therefore, decreases.

Discuss the following statement: “In order to finance its budget deficit, the US government must borrow from the private sector.” How does the government borrow from the American people?

When the Government borrows money, it doesn’t go to the bank and apply for a loan. It issues debt, A bond is a fixed interest financial asset issued by governments, companies, banks, etc. This means the Government sells bonds to the other private sectors or people.

Will fiscal stimulus in the short-run lead to increased growth or decreased growth in the long-run? Discuss.

Fiscal stimulus in the short-run will lead to decreased growth in the long-run because of the crowding-out. As the government is pending on the economy the interest rates will increase causing low investments from firms and people.

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2.?n general the borrowers(when they need money ) just like they are borrowing money from bank, after a time they pay back the money more and more to the bank. However the government will somehow borrow some money from citizen from what they have invested in government bonds, so that they will pay the money back with some interest but not that much.

3.the fiscal stimulus will lead to the economic growth as we see that the actual development which is related to the growth as I read the article. Specifically in the improvements of health care and education for instance, we will be able to see the new group of employees will take place to see the changing economy of development and growth in all improvements which will be beneficial for all. However, in contrast, as also is thought logically, the fiscal stimulus could lead to a decreased growth in the long-run because of the government penetration creation. Thus, if the money comes from taxes or bank, consumption could be harmed.

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Dont you think crowding out is a long run consept and will lead to the decline of growth only in the long run?

Becuase in the beginning you claim that crowding out is a long term phenoemenon, but in question 3 you claim that its effects will be felt in the short term.

Otherwise, i agree.

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Assuming that the recession is a short term crisis, it is unlikely that crowding out private investment is a problem in the short term. Since it takes time for crowding out to occur, during a recession an increase is likely to stimulate aggregate demand. In the long run however government must take initiative to increase real GDP to compensate for the effect of crowding out by implementing low-cost supply side policies.

• Discuss the following statement: “In order to finance its budget deficit, the US government must borrow from the private sector.” How does the government borrow from the American people?

T compromise for its budget deficit a government will have to borrow money. It does so by selling government bonds, such as treasury bills or treasury bonds, to banks, who then sell them to people who want to save their money. The prices for consumers of these bonds are interest rates. Thus, the government is indirectly borrowing money from the people by selling government bonds.

• Will fiscal stimulus in the short-run lead to increased growth or decreased growth in the long-run? Discuss.

Fiscal stimulus imposed by the government in the short run will decrease growth in the long run. Government deficit spending will increase interest rates in the market of loanable funds. This is because either the demand for loanable funds will increase and thus prices will rise, or the supply of loanable funds will decrease and the price of loanable funds will rise. Higher interest rates will decrease the incentive of investors to buy bonds to increase the factors of production. Hence, investment in an economy will decrease since firms are better off saving than investing when interest rates are high. Thus, in the long run “sluggish growth” will occur as mentioned in the article.

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In my opinion, crowding out is a negligible problem during a recession, because recession is a short-term problem, while crowding out results in long-term problems. During a recession, aggregate demand falls significantly. The use of fiscal policy would be good during the recession, because it increases the aggregate demand. So, the crowding out effect isn't much of a problem during the recession period.

2. Discuss the following statement: “In order to finance its budget deficit, the US government must borrow from the private sector.” How does the government borrow from the American people?

The government sells bonds at some interest rates to the United States population. After a while, it pays back the money to the public and also pays the interest on the maturity date.

3. Will fiscal stimulus in the short-run lead to increased growth or decreased growth in the long-run? Discuss.

The fiscal stimulus in the short run result in the crowding out. When we have the crowding out effect, interest rates increase. So, with higher interest rates, it is obvious that investors would try to buy bonds and get more money from the government, rather than investing this money in the firms. Low investment leads to low production and we can see that fiscal stimulus lead to decreased growth in the long-run.

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I agree with you about: The rise in interest rates will cause production to decrease and it is like a chain that when production and the demand decrease ,the economic growth will decrease.

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I think it will be a problem in recession time, because crowding out is the thing that government is competing with private firms. This situation will cause interest rates to increase. If interest rates increase then private firms won’t want to invest their money and it decreases aggregate supply and demand. Also, in recession time there is a bad economic growth and after crowding out it will be worse.

2.Discuss the following statement: “In order to finance its budget deficit, the US government must borrow from the private sector.” How does the government borrow from the American people?

The method is selling bonds. The government gives it back with some interest.

3.Will fiscal stimulus in the short-run lead to increased growth or decreased growth in the long-run? Discuss.

It depends on the level of fiscal stimulus so that both cases may happen. For example if fiscal stimulus is not too much it can influence productive side of people and it is good for economic growth. But if the fiscal stimulus is larger than it is then it can cause crowd out and it means that government will compete with private firms for funding. It will increase the interest rates. Because of the rise in interest rates production will decrease.When production and the demand decrease ,the economic growth will decrease.

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Will the use of fiscal policy always lead to decreased growth in the long run?

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The government borrows from the people through taxes.

Depending on the extent of the ‘crowding out’, the growth will vary. With lots of crowding out, the growth will likely be decreased and vice-versa

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Hi Melis,

I agree with you about the crowd-out, it is really dangerous for the government because it means borrowing from the private sector which will lower the production and slow down the eceonomic development.

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2. Discuss the following statement: “In order to finance its budget deficit, the US government must borrow from the private sector.” How does the government borrow from the American people?

3. Will fiscal stimulus in the short-run lead to increased growth or decreased growth in the long-run? Discuss.

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1. yes, I think that crowding-out is a big problem during recession times, because at those times goverment is needed badly to control the situation, but since crowding out occurs, government will not be that efficient. In recession, the production is really low, and to imrove that situation, the private sector should continue doing investments to contunie economic growth and development, but if government borders it, than this i just worse. Therefore, the interest rates will rise enourmously, the rate of investment will decrease, and during the time of recession, the economy will just get worse and it is going to be disasterous.

2. The government can rise the taxes for the private sector. Or by the bonds the government can borrow some money. Buying bonds back with interest will help the government to borrow money. Also, the taxes will turn into services and goods.

3. I think that it depends on the level of iscal stmulus. It can also cause increased growth and decreased growth. If the level of fiscal sitmulus is not too high, this can be postiive for the economy and can cause the economy to develop. Unfortunately, if the fiscal stimulus level is too high, this will cause crowd out and this is too bad for the economy because this time the government will start competing with the private sector firms. The production will decrease which will mean lower GDPs and a decreased growth.

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I think your answers are short and clear, but I think for the first question that it would be a problem in the recession.

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This is a problem during a recession. This is because in the period of recession, both AD and AS are low. The firms can overcome the recession by using the funds done by the private investments. However, if government causes a decrease in the investment, it would be challenging to the firms to recover.

2. Discuss the following statement: “In order to finance its budget deficit, the US government must borrow from the private sector.” How does the government borrow from the American people?

The bonds would be emitted by the government, so that the government would receive money from public. For a period of time, the investments would be appealing. Then the government would have the original buyers, again.

3. Will fiscal stimulus in the short-run lead to increased growth or decreased growth in the long-run? Discuss.

It may cause a decrease in the long-run because the private investment would fall due to the increase in the interest rate. Because of the crowding-out, GDP would decrease. In the short-run, it may lead to increased growth. This is because the government would increase spending to the economy; thus, GDP would increase.

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