Business, Legal & Accounting Glossary
Borrowing is the act of receiving something which will be returned in the future. In finance and economics, borrowing generally refers to receiving money. In simple terms, borrowing can be illustrated as the act of receiving a certain amount of money with the intention that the receiver will have to return the same amount of money after a fixed span of time. Money is usually borrowed from several financial institutions or even from individuals.
When it comes to borrowing monetary aid, banks are the most reliable source. Apart from banks, credit-card companies and other consumer-finance establishments are popular choices for borrowing money.
Borrowing mostly takes place in the financial market, apart from that borrowing is also popular in the secondary market. In a bond market, the seller of a bond is known as a borrower as he receives money on selling a bond. The buyer of bond is a lender or investor who pays off a certain amount of money in exchange for assurances of future repayment.
The act of obtaining funds by the government sector usually through financial markets is referred to as government borrowing. According to the circular flow model of macroeconomics, there are two major sources of savings, one is an investment in the financial market that is investment borrowing and other is taxes. Government sector needs money to pay the government expenditures. Government borrowing acts as one of the major sources of money that can be used to pay for government expenditures.
A major source of earning for the government sector is through financial markets. An important role of the financial market is to divert household sector funds into investment expenditure and government purchases. The process is accomplished by trading legal declarations.
There are several reasons that support government borrowing. Two major ones include expansionary fiscal policy and an increase in government investment in public services. In order to enhance economic growth, the government tries to increase spending by cutting taxes so that aggregate demand rises. This results in budget deficit as spending increases than taxes. If the government decides to spend more on public services like education and training, the government borrows money from the household sector. This leads to fetch higher taxes in future
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This glossary post was last updated: 26th March, 2020 | 3 Views.