The Effects of Fiscal Policy on Private Business Investment

DUE DATE: Sunday, April 6 by 9:00 PM on the NetTutor website:

http://www.nettutor.com/worth/econ/wsu
In January, 2012, the McKinsey Global Institute published "Debt and deleveraging: Uneven
progress on the path to growth." In the executive summary, the following observations were made
about the state of investment spending in the United States (and the U.K.):
"Today, annual private investment in the United States and the United Kingdom is equal to roughly
12 percent of GDP, approximately 5 percentage points below pre-crisis peaks. Both business
investment and residential real estate investment declined sharply during the credit crisis and the
ensuing recession.
The authors identify six markers of successful recovery from a financial crisis. One of those
markers is a credible plan for balancing the governments budget in the long-run. In their words, we
need long-term fiscal sustainability. Why is long-term fiscal sustainability important for todays
economic growth? In particular, how would a failure to present a credible plan for balancing the
governments budget in the long run affect private business investment? Explain fully, using the
model of loanable funds you studied in Chapter 10. In your answer, address the following points:

Explain how economic growth occurs

o Explain how business investment contributes to that growth in two ways.
(See the powerpoint from Week 7 Tuesday Economic Growth and Week 8
Thursday Writing Assignment 3)
Explain how interest rates influence the incentive to invest. Make it clear that you
understand the logic why does an increase in the market interest rate reduce the
incentive to invest? This paragraph should comprise the bulk of your paper. (See
Chapter 10 in your text and 10C and 10D in your course pack.)
Explain how large government budget deficits year after year will have an impact on
the equilibrium interest rate using the Loanable Funds model presented in Chapter
10.
Summarize in a concluding paragraph why did the McKinsey Global Institute
conclude that long-term fiscal sustainability is important for economic growth? Be
sure to define the term fiscal sustainability in your answer. (See the Week 8
Thursday Writing Assignment 3 powerpoint).

 Grading Rubric

Your essay will be assessed as either Meets expectations or Needs improvement. If your
essay needs improvement, you will be given feedback from NetTutor to help you revise it.
You can then re-submit the essay to NetTutor for another try but you only get one second
chance. Youll need to accumulate three acceptable writing assignments to fulfill the writing
portion of the course requirements. The table below shows the criteria your essay will be
judged against.
Criterion

Writing

Application of economic
analysis

Needs Improvement
The writing is difficult to follow
and/or poorly organized.
Transition sentences are
absent or ineffective. Typos
and/or grammatical errors
distract the reader.

Meets Expectations
Ideas are well-organized.
Transition sentences
effectively connect one idea to
the next. The essay is free of
typos and grammatical errors.

The determinants of economic

growth are not discussed, or
are incorrectly identified.

The determinants of economic

growth are correctly identified.

The role of business

investment in fostering
economic growth is incomplete
or incorrect.

The role of business

investment in fostering
economic growth is accurately
and thoroughly explained.

The effect of interest rates on

investment is misunderstood
or omitted.
The impact of government
budget deficits on interest
rates is incompletely or
incorrectly determined.

The student demonstrates a

firm understanding of the
effect of interest rates on
investment.
The impact of government
budget deficits on interest
rates is completely and
correctly determined.

The concluding paragraph does

not present a well-organized
summary of the argument.

The concluding paragraph

accurately summarizes the
argument.

The term fiscal sustainability

is not defined, or is defined
incorrectly.

The term fiscal sustainability

is correctly defined.

Conclusion