In December 2010, Ireland passed a budget designed to cut the size of the budget deficit. An article in the Economist stated: “‘everybody pays’ was the theme of Brian Lenihan, the Irish finance minister, when he presented the toughest budget in Ireland’s history on December 7th.”Deficit reduction was largely accomplished through spending cuts, including cuts in welfare programs and some government salaries. There was also an increase in some taxes and fees.
a. What is the likely effect of these actions on the loan able funds market?
b. How are the short-run and long-run effects of this deficit reduction likely to be different?