Quote from: snappa4ever on September 22, 2014, 05:21:30 AM

Quote from: RoadTrain on September 21, 2014, 07:10:24 PM

Quote from: dankkk on September 21, 2014, 05:27:17 PM

When the government spends an additional dollar, the private sector will spend some amount less. The reason for this is because when the government borrows money the private sector will need to lend to it. US government debt is generally considered to be near risk free, and can be used as collateral for loans at almost 100% of it's value. Since the private sector can not borrow 100% of the value of government debt, the amount below 100% that cannot be borrowed against is the amount of lower economic output due to additional government spending.

I think I'm kinda confused. Do you want to say that when government spends additional dollar, the economic output effectively decreases?

Not to say that it's not private sector that needs to lend to the gov't, it's the gov't that issues debt so that private sector can easily net save.

I would argue that when the government spends an additional dollar the private sector will spend a little bit less (at first well under a penny, but if government spends gets to high enough levels it will increase). Therefore when the government spends an additional dollar the total economy increases by less then one dollar.

And once again we come to the GDP calculating principle which clearly defines how government spending contributes to the economic output.