Question

1. What is the difference between federal budget surpluses versus a budget deficit?

2. Name and explain two reasons for a housing bubble?

Answer 1

1.
Federal Budget surplus reflects that revenue collected from different avenues such as taxes, are more than the government spending. It means that government will not be forced to take any debt, rather the government can either partial repay the existing debt, or make further spending upon the capital projects such as infrastructure, health care or education sector. In contrary to this, a federal budget deficit shows than government spending is higher than the revenue collected by the government. In this case, the government can issue bonds to bridge the gap or bring austerity measures to curtail the expenses that are unnecessary. A deficit can force the government to reduce the transfer payments to reduce the deficit in coming years.

2.
The housing bubble was created due to the following reasons:
A.   Excessive lending to the subprime customers that created new business assets for the banks, but it increased the risk quotient of the assets. Banks neglected the guidelines and issued loans to the people   with poor credit history. It led to the rise in demand and bubble got created.
B.   Deregulation in the banking and financial system with lower interest rates. It also attracts huge number of buyers and banks issued loans to these homebuyers. It was a preconceived belief among the buyers that home buying is always going to be good investments. This belief, bank’s propensity to issue loans and lower interest rates, contributed to the increased demand of houses. It created the bubble.