twin deficits theorem? (1 Viewer)

[jimmik]

can somebody please explain this to me? is it important to know for the exam tmr cuz i dont understand it..

 

[ToO LaZy ^*]

when the government runs a budget deficit, they will need to borrow money to finance the deficit. when this happens, the government pushes interest rates higher to encourage the private sector to lend their money to the government. this causes the private sector to be 'crowded out', forcing them to borrow overseas due to lower interest rates. this will increase our net debt and net incomes component on the current account, resulting in worsened CAD. therefore the government has effectively caused not only the budget deficit, but the CAD, hence the 'twin deficit'

hope that clears things up..

 

[:: dreami ::]

twin deficit is fiscal deficit and cad deficit

god, this is not completely accurate but i will try

when the fiscal budget is in deficit, it usually means they are spending more and thus the economy is booming...

when the economy is booming, imports will increase and general increased consumption will cause the CAD to go into deficit as well

when the CAD is in deficit, the economy goes crazy etc etc

 

[ar5ena1]

dreami thats not accurate, look at too lazy for the accurate answer.

 

[:: dreami ::]

woopsie doodle

EVERYONE MY ANSWER IS WRONG SO PLEASE FLUSH IT FROM YOUR BRAINS

 

[Acid]

I think dreami's explanation fits the bill too.... it can be related to any situation that forces a budget deficit and a CAD..

 

[:: dreami ::]

i had a rethink...

twin deficit just refers to the deficit of fiscal outcome and cad and the relationship or more so, impact fiscal has on cad?

either way...

 

[underthebridge]

i had a rethink...

twin deficit just refers to the deficit of fiscal outcome and cad and the relationship or more so, impact fiscal has on cad?

either way...

Note: a budget deficit does not automatically make the economy boom, just as a surplus budget does not autmoatically slow down economic growth. This is due to the fact that all the other factors that contribute to ec. growth may change due to certain circumstances.

The other guy's explanation is more accurate, the government funds a deficit by borrowing from the Aus. public --> the private sector. In doing so, this forces them to borrow overseas, contributing to our CAD.

The twin deficits argument was the main reason why there was a switch from keynesian theory (where budget deficits were popular as they contribute to economic growth).

 

[underthebridge]

Deficit budgets were actually produced in Australia since about the 60s or so, and the 1982/83 recession proves that a deficit budget doesn't automatically send an ec. into an upswing

 

[jimmik]

thank you so much everyone, that certainly cleared it up. special thanks to too_lazy. if this ques comes up in the exam tomoro, u mite as well hav saved my butt hehehe.

 

[underthebridge]

when the government runs a budget deficit, they will need to borrow money to finance the deficit. when this happens, the government pushes interest rates higher to encourage the private sector to lend their money to the government. this causes the private sector to be 'crowded out', forcing them to borrow overseas due to lower interest rates. this will increase our net debt and net incomes component on the current account, resulting in worsened CAD. therefore the government has effectively caused not only the budget deficit, but the CAD, hence the 'twin deficit'

hope that clears things up..

can i ask how does the government raise interest rates?? unless you mean borrow from the public through the RBA who sells commonwealth government securities with higher yields to encourage borrowers? I just want to clarify.

 

[chazza]

can i ask how does the government raise interest rates?? unless you mean borrow from the public through the RBA who sells commonwealth government securities with higher yields to encourage borrowers? I just want to clarify.

i think he or she means..the gov will influence the RBA.. to raise interest rates