Monday, February 1, 2010

Planned Injections not Equalling Withdrawals

We've covered the circular flow of income recently in lectures, and in particular looked at government spending G (injection) and taxation T (withdrawal).

We also said that there is nothing guaranteeing that injections will equal withdrawals, although we talked about forces that will force equilibrium to be restored.

President Obama today announced a $1.56tn (yes, trillion) budget deficit plan for the US, in a very obvious example of injections massively exceeding withdrawals for the US economy.

The US government is still attempting to stimulate economic activity in the US economy by injecting money into the circular flow.

Naturally in years to come forces will move to close this deficit: Either the US economy will grow strongly (enabling spending on benefits to fall and tax revenues to increase), US inflation will rise (reducing the dollar value of the debt), or the US will default on its debt obligations - or some combination of those three...

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