Share your experience in the simulation. What strategies did you pursue? Were you successful in reducing the debt?

Share your experience in the simulation. What strategies did you pursue? Were you successful in reducing the debt?

Share your experience in the simulation. What strategies did you pursue? Were you successful in reducing the debt?

6.2 Discussion

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Share your experience in the simulation. What strategies did you pursue? Were you successful in reducing the debt?

 My experience with simulation was awesome. The results of the simulation show that I managed to stabilize the debt in the short-term, but long-term debt remains high. My strategy was to enhance interest rates and taxes and increase savings in areas such as social security, healthcare, and defense. This led to a reduction in investment. According to Mankiw (2021), an increase in the price level raises money demand and elevation in the interest rate which causes the money market to come to equilibrium. Since the interest rate characterizes the cost of borrowing, an elevated interest rate lowers spending in investment, thus, lowering the quantity of goods and services demanded. Unfortunately, this is unpromising in promoting future growth in the job market. I raised revenues by introducing new taxes. My debt as a percentage of GDP in 2033 is 90% and will be 88% in 2050. This indicates that the debt remains high in the long run and was only stabilized in the short term.

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In your opinion, is a high national debt a problem for future economic growth? What is the ideal debt-to-GDP ratio?

  The relationship between debt surges and future economic growth is intricate. The high national debt has the most adverse impact on future economic growth outlooks. The high national debt is often followed by weaker growth in the economy and constantly lower output, especially where the economy is grappling with a significant positive output gap (Heimberger, 2021). The high national debt can also impede economic growth if the original debt levels are high. Surges in national debt are linked to weaker public and private investment leading to a bleak future economic growth. Debt surges also put future key investments at risk. Elevated interest costs could crowd out vital public investments that drive economic growth such as research and development, education, and infrastructure (Heimberger, 2021). A country with a high debt burden has limited resources to invest in its future.

 The debt-to-GDP ratio connotes a metric used in comparing a nation’s public debt to its GDP (Lagoa et al., 2022). By determining what a nation owes with what it generates, the debt-to-GDP ratio accurately demonstrates the ability of that particular nation to repay its debt. This ratio can also indicate the number of years a country needs to pay back its debt, especially where the GDP is fully committed to debt repayment (Lagoa et al., 2022). Usually, when the debt-to-GDP ratio is high, the country is less likely to repay its debt, which could lead to financial panic in both local and global markets.

Explain what the crowding-out effect is and why it’s considered a negative effect of increased government spending

 The crowding-out effect is defined as a theory that advances the idea that increased government spending eventually decreases spending by the private sector (Mankiw, 2021). As a result, interest rates tend to increase, which impacts decisions by private investments. The crowding-out effect is considered a negative effect of increased government spending because when it is extreme, it can cause a reduction in income in the economy. According to Mankiw (2021), interest rates become limited in the market when the government borrows greatly to reduce the debt in the economy. This leads to an increment in the interest rates, which discourages the private sector from investing in the economy due to the huge cost of loans.

References

Heimberger, P. (2021). Do higher public debt levels reduce economic growth? Journal of Economic Surveys. https://doi.org/10.1111/joes.12536

Lagoa, S. C., Leão, E. R., & Bhimjee, D. P. (2022). Dynamics of the public-debt-to-gdp ratio: can it explain the risk premium of treasury bonds? Empirica, 1-34. https://doi.org/10.1007/s10663-022-09547-8

Mankiw, N. G. (2021). Principles of economics (9th ed.). Cengage Learning.

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• Share your experience in the simulation. What strategies did you pursue? Were you successful in reducing the debt?
• In your opinion, is a high national debt a problem for future economic growth? What is the ideal debt-to-GDP ratio? Research academic sources or refer to the information available through the simulation to support your opinion.
• Government spending increases national debt and can cause a crowding-out effect. Explain what the crowding-out effect is and why it’s considered a negative effect of increased government spending. Use information from the textbook to support your analysis.
• Use proper citation methods for your discipline when referencing scholarly or popular sources.

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