Question

summarize each of the following
a) lower national savings and income
b) higher interest payments, leading to large tax hikes and spending cuts
c) decreased ability to respond to problems
d) greater risk of a fiscal crisis

Answer 1

A.Lower national savings leads to lower rate of investment. Lower savings rate reflects the decision of economy to consume more in the short run rather to invest for the long run. A higher savings rate could enable the banks to lend more for investment. Low level of savings could increase the level of short run consumption, but the lack of investment will lot help the nation to attain more income. Income is depended on the level of consumption and investment. Thus, investment is depended on savings, a low savings rate will leads to low level of income after low investment rate.
B.Higher interest payment on debts will lead to increased tax rates and spending cut. These will negatively affect the economy on the consumption side. The increased tax rates will reduce the disposable income that further reduces the level of demand and consumption. Also, higher interest payment burden on the government will reduce the spending rates which reduce the overall demand in the economy thus reducing the growth.
C. inability to respond to problems will create further complication in the economy. Inefficiency to manage inflation or deflation crisis will further leads to more severe of the inflationary or the deflationary situation. Fiscal or monetary policies would not be effective to tackle the problems affected the economy. An expansionary monetary policy to tackle deflation may not be effective if it becomes less able to respond to the problem.
D.A fiscal crisis would lose the confidence of an economy from the fiscal debt and government policies may not be effective to convince the international market and investors. Fiscal crisis would leads to instable currency, losing the confidence over the economy, affecting the level of investments etc. These all are the risks behind fiscal crisis that would leads to stagflation and less economic growth.