Answer to Question #89441 in Macroeconomics for Massina Veremaito

Question

If reducing debt means spending cuts, will aggregate expenditure fall by more than, less than or exactly the same as the spending cuts? Explain

Answer 1

Debt is one of the challenges that negatively impact the growth of the country's economy. Delays in, re-paying debt force the central bank to increase the interest rates and then, the interest payment eats up the growing share of government spending, leaving less fund that provides various services to the public. To solve the problem, debt should be reduced which means that the spending will be reduced too. As a result, the aggregate expenditure will be the same as the spending cuts.It is because the spending used determines the output of goods and services produced in an economy. When the consumption of the expense is increased, the aggregate expenditure increase too pushing the country's economy to a higher level of the equilibrium.