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Economics a2 macro debt

What are the economic problems with high private sector debt when recovering from a recession? Any ideas would be appreciated
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Mav455
17
Hi :smile:
First, try going on Tutor2u, its a great revision website with notes on all economic topics
Second the ideas I can think of are:
They might pass of the debt in the form of higher prices, exploiting consumers
The govt may have to bail them out, govts receive less tax revenue from them
This is worse in a recession, they have less incentive to invest due to the debt
In a recession, you have the private sector paying off debt (leading to lower private sector consumption and investment) This leads to a fall in aggregate demand. If the government also cuts spending then there will be an even bigger fall in demand. Keynesian economics suggests in a liquidity trap, we should increase government spending to offset the fall in private sector spending.
(the last point is from here : http://www.economicshelp.org/blog/5366/economics/austerity-pros-and-cons/)
Hope that helps :smile:

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