Answer to Question #63572 in Macroeconomics for gibson ngetich

Question

The economy of Kenya has a budget deficit of KSH 500B. This deficit is likely to be funded through domestic borrowing and taxation. Using an appropriate model, explain the macroeconomic implications of such a move.

Answer 1

Funding of this deficit though taxation includes additional taxes and increasing of current taxes rates. It helps to gather necessary money to fill the government budget in the nearest time. Although, it has just a short effect, because increase in taxes can decrease business activity. It can be a reason that a part of economy will become an informal economy.
Financing of this deficit though domestic borrowing is not the unique decision too. This method means that a state allows government securities and sells them to population. It has also disadvantages. It’s explained that the government must pay bond yields of population. These payments are spending of the government budget. The more bond yields, the more a budget deficit.