To fund its debt, the government competes with the private sector for loans, driving up interest rates. This makes it harder for businesses to invest, slowing long-term productivity.
In a boom, tax receipts rise and spending on benefits falls, naturally cooling the economy. Fiscal Policy and Macroeconomic Imbalances
Persistent fiscal deficits lead to a rising debt-to-GDP ratio. While debt can fund productive investment, excessive borrowing creates two major imbalances: To fund its debt, the government competes with
If investors lose confidence in a government’s ability to repay, capital flight occurs. This can trigger a currency crisis, as seen in the Eurozone debt crisis, where fiscal imbalances in one nation threatened the stability of the entire monetary union. 4. The Role of Automatic Stabilizers To fund its debt