Question

Does the source of funding matters – whether by a gift from the World Bank? a loan from the IMF? Or increased government spending financed by borrowing? Does it matter if the economy were in “full employment”?

Answer 1

Each source of funding has its own cost of capital. Hence, it is very important to know the source of funding and its implications upon the business and economy. For example, world bank gives gifts to the poorest countries to develop their basic infrastructure and other development projects. These gifts either come free or at a very lower rate of interest. But, it is a medium as well to develop these countries as market for the MNCs of those nations who provide funds to the World Bank. In contrast to it, a loan from IMF comes with a clear agenda of economic development, liberalization and opening up of the economy other than stopping the slump in the economy to get the funds as loans. These loans are also to be paid at an interest rate. So, this loan is more costly than the gifts given by the World Bank.

Government financing by borrowing also increases the rates in the economy for private businesses and they are discouraged. It has its own negative consequences.

It matters that economy is at full employment, because at this level, government spending will only increase the inflation and real GDP will remain same. So, spending at full employment should be curtailed.