Question

1 How does the spending by government and the taxes used to finance that spending affect the overall economy?

2 Explain how low interest rates impact banks compared to consumers

Answer 1

1.The spending by government and the taxes used to finance that spending affect the overall economy positively or negatively as well because there is a high possibility that with the rise in taxes by the government will also increase government expenditure by the way of spending which will negate the effect and with this it would bring no change in the aggregate demand and further the economy witnesses the rise in GDP this is a positive impact on the economy but on next hand some economists argue that increasing government expenditure through taxes would crowd out the private players in the economy and in addition to this would lead to inefficient resource allocation as government will be less effective in spending .

2. The banking sector profitability increase with the increase in interest rates and decrease in interest rate decreases the profits of banks as the interest rate lowers due to this the loss if 1% incurred by customers the banks would incur 2 or 3% lose because the investment made by them in the short terms notes vary which is two or three fold more to banks. Another reason to this is that as rates rises the the profitability on loans for the banks decreases as they will be getting less bank charges from before.