To fund its debt, the government competes with the private sector for loans, driving up interest rates. This makes it harder for businesses to invest, slowing long-term productivity.
Fiscal policy is a balancing act. While it is essential for correcting market failures and supporting growth, its misuse can lead to systemic instability. Achieving a "General Equilibrium" requires fiscal authorities to work in tandem with monetary policy to ensure that government actions don't inadvertently create the very imbalances they seek to avoid. Fiscal Policy and Macroeconomic Imbalances
When a government spends heavily or cuts taxes during near-full employment, it risks "overheating" the economy. Excess demand pushes prices up, leading to high inflation. To fund its debt, the government competes with