Question

Week 5 worksheet L. Explain why aa do. reay is the gsivernment budget deficit could lead to an increase in invest ment by firns. 2. Suppose that beca tse of a rising price level, consumer starts carrying more of their wealth as cash, in order to curty ouk trvsactions, and thus are less willing to put their wealth into other assets-s?ch as stuck, or bonds. Depict the effect this will have on the market for loanable funds, and expiais wbat wil aappen to both interest rates and investroent.

Answer 1

Explain why a decrease in the government budget deficit could lead to an increase in investment by firms?

Answer: A decrease in the U.S. government budget deficit would increase national saving, as a result shifts the supply curve of loanable funds to the right. This would decline the real interest rate in the nation, thus increasing net capital outflow. Consequently will increase the investment by firms and declining the real exchange rate