The paper "Monetary and Fiscal Growth" is a wonderful example of an assignment on macro and microeconomics. The financial crisis has led to huge budget deficits and a large increase in debt-to-GDP ratios of advanced economies. The economic downswing witnessed in the 2008-2009 crises has led to unprecedented economic anxiety globally. The long-term impact of this crisis remains uncertain and is a concern for many governments and economies. The high debt-to-GDP ratio has made it difficult for many countries to pay external debts and has led to investors seeking higher interest rates when lending.
Consequently, when they are unable to pay their debt, governments are likely to default. Sovereign debt defaults are likely to cause a panic in the domestic and international financial markets which has devastating consequences globally. Financial crises have historically led governments to default on their debt obligations (Hilsenrath, 2010). Basically, the higher the debt-to-GDP ratio, the less likely a country will pay its debt, and the higher the risk of default. There is no ideal debt-to-GDP ratio but governments should focus on sustaining certain stability as far as the debt levels are concerned.
Stability in this case refers to cases where a government is able to finance its debts through the payment of interest without harming its economic growth patterns or refinancing its economic expenditures. Notably, every government needs money to fulfill its obligations; this money comes from the collection of taxes, and from borrowing from investors and other agencies. Each year governments prepare budget estimates highlighting the expenses which are expected to be financed by tax revenues and borrowed money. According to Taylor (2012), advanced economies have over the past decades accumulated budget deficits because they have been unwilling or unable to collect sufficient amounts of taxes to cover their expenses.
This has lead to a situation whereby the investors and financial markets are jittery about the ability of the government to repay their debts. Hence they ask for higher interest rates to compensate for the increased risk.
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