Fiscal policy. The Effect of Fiscal Policy on Private Business Investments (Essay Sample)

How does business investment foster long-run economic growth?
o Explain how economic growth occurs. (That is, what causes the boundary of the
Production Possibility Frontier to shift outward over time?) Be sure to define the
terms ‘resources’ and ‘capital.’
o Explain how business investment contributes to that growth in two ways. ((Review
the Week 6 Tuesday powerpoint on Economic Growth and the definition of
Investment in the Week 7 Tuesday powerpoint on Module 20.)
 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. (Review the powerpoint
on Module 21).
 When the government runs large budget deficits year after year, it must continuously
borrow money to finance those deficits, and that increase in the demand for funds pushes
the equilibrium market interest rate higher. Thus, failure to present a credible plan for
balancing the government’s budget in the long run means that interest rates will be higher
than they otherwise would be. Explain what this implies for the level of investment.
 Summarize in a concluding paragraph – why did the McKinsey Global Institute conclude
that long-term fiscal sustainability is important for economic growth?