1 If there is no discretionary increase in government spending then the business cycle will affect the size of the budget surplus and also the investment and trade balance. When the economy is in upswing then the government will collect more taxes as people will have more spending power. Similarly the investment balance would improve as firms would invest more in capital to cater to an increasing demand for goods and services. The trade balance would be in a deficit as improving conditions at home would mean that consumers at home have more purchasing power and hence imports would increase while exports decrease.
2 Domestic investment is made up of two sources private investment an public investment. The investment must be financed by domestic savers or foreign savers. When the budget is in deficit then in order to finance its deficit the public sector crowds out the consumption an investment of the private sector and since consumption and investment are two key components of economic growth a decrease in both of them means that aggregate growth rate of the economy goes down.(Bernanke &Franke,150)
3 The savings investment identity states that investment is financed through savings. If the UD government shuts down then the level of public investment will go down, in other words all the savings will be used to finance the private sector investment. Yes the shutdown will affect the government budget as the government will not be able to finance its deficit from borrowing any more.
4 The main reason is that the private sector is simply more efficient than the public sector in doing this. The private sector has the ability to internalize the positive externality which in this case is research and development where as the public sector simply lacks it.
5Increased government spending would not inhibit economic growth If the increased spending does not crowd out private sector consumption and investment. It will impede economic growth If the government spending crowds out the private sector consumption and investment.(Principles of Macroecnomics,238)
REFERENCE LIST
Bernanke Ben &Frank Robert. Principles of Macroeconomics. McGraw Hill,2012.
Principles of Macroeconomics OpenStax College.Rice University ,2014.
