Homework Answers
When government deficit occurs then government issue more bonds
and take loans from the market. Since capital is limited when
government takes loans it crowds out the supply of funds to the
economy. This crowding out decreases the supply of loanable funds
for private investment. Decrease in supply of loans causes interest
rates to go up.Hence demand for loanable funds also decreases and
investment decreases.
Internal debt occurs when government borrows money from its own
economy or people .This leads to problem of crowding out and
interest rate goes up. However it can help boost the welfare
schemes in an economy because money will distributed from the rich
to the poor through internal debt.
External debt occurs when there is sovereign borrowing from other
countries.Since interest payments are made to foreign countries,
this causes burden on the domestic economy. The government might
have to increase taxes for that.This may slowdown the economy.
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Why do some economists argue that federal government budget deficits contribute to increased market rates of...
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As a result of government borrowing to cover deficits, citizens increase the supply of savings to provide themselves with funds to pay anticipated increases in future taxes. Then it follows that increased government borrowing will O reduce private investment. increase private investment Ohave no effect of private investment. O increase interest rates. O both (a) and (d) Government borrowing will: O postpone taxation to the future. increase government interest cost. both (a) and (b) O eliminate taxes. The largest portion...
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Assume that the market for loanble funds is in equilibrium and that the federal government budget...
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c) Predict what will happen to interest rates on a corporation's bonds if the federal government...
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As a result of government borrowing to cover deficits, citizens increase the supply of savings to provide themselves with funds to pay anticipated increases in future taxes. Then it follows that increased government borrowing will O reduce private investment. increase private investment Ohave no effect of private investment. O increase interest rates. O both (a) and (d) Government borrowing will: O postpone taxation to the future. increase government interest cost. both (a) and (b) O eliminate taxes. The largest portion...
c) Predict what will happen to interest rates on a corporation's bonds if the federal government guarantees today that it will pay creditors if the corporation goes bankrupt in the future. What will happen to the interest rates on Treasury securities? d) In 2010 and 2011, the government of Greece risked defaulting on its debt due to a severe budget crisis. Using bond market graphs, compare the effects on the risk premium between U.S. Treasury debt and comparable-maturity Greek debt.
6. Monetizing the deficit One of the major objections to government budget deficits is that they may be inflationary. In addition, some worry that the Federal Reserve may monetize part of the deficit by buying some of the newly issued debt, potentially causing even more inflation. In general, a tax cut increases both real GDP and the price level, since it causes aggregate demand to increase. The following graph shows the demand and supply of bank reserves. Show the initial...
4. Explain the historical relationship between the US trade deficit and budget deficit? Why do some economists consider this to be problem- atic? Why do some economists consider the (opposite) relationship for China to be problematic? Why do some researchers believe this has not been a historical cause of worry for the US? (You may have to do some research on the last part and some reading ahead on the first). 5. Explain what is meant by covered interest parity...
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