Leaping Debt Costs Add to U.K. Government Borrowing

EconEye Admin

4 years ago

Surging debt interest costs forced the U.K. government to borrow more than expected in May. Finance minister Rishi Sunak remains under pressure to borrow even more as a slowing economy threatens to reduce tax revenues.—reuters.com

Answer the following questions to check your understanding of the story.

1) When is the U.K. government budget in a deficit?

The U.K. government budget is in a deficit when ______________.

a) the interest rate on the government’s debt is rising

b) government debt exists

c) the economic growth rate is slowing

d) the government’s receipts are insufficient to pay for its outlays

Wrong! - What information do we need to determine if the U.K. government budget is a deficit?

Correct! - A government budget deficit arises when the government’s outlays exceed its receipts.

2) What is the outcome when the U.K. government goes to the loanable funds market to finance its current deficit?

The U.K. government’s action ______________.

a) increases both the supply of and demand for loanable funds and no crowding out occurs

b) decreases the supply of loanable funds, which crowds out private investment

c) increases the demand for loanable funds, which crowds out private investment

d) increases the demand for loanable funds, which crowds out private saving

Wrong! - When the U.K. government goes to the loanable funds market to finance its current deficit, does the demand for loanable funds or the supply of loanable funds change? What happens to the real interest rate? How does this change in the real interest rate influence private investment and private saving?

Correct! - Financing the U.K. government budget deficit increases the demand for loanable funds. The real interest rate rises, which decreases private investment.

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