If the budget deficit increases then?
If the budget deficit increases then
a. saving rises and the interest rate falls
b. saving falls and the interest rate rises
c. saving and the interest rate rise
d. saving and the interest rate falls
a. saving rises and the interest rate falls
b. saving falls and the interest rate rises
c. saving and the interest rate rise
d. saving and the interest rate falls
Answer : b
An increasing budget deficit means that the government's debts are increasing and the government's saving is decreasing. The interest rate will increase due to the borrowing which will have the crowding-out effects. That means the government has to offer higher interest rate to lure private saving, and to decrease private investment. The budget deficit will mostly come along with the current account deficit. The foreign debts are increasing too. The answer is B obviously.
In a small open economy,
Savings - Investment = Net Exports
S - I = NX
(Y - C - G) - I = NX
( (Y + T - C) + (T - G) ) - I = NX
T - G represents the government's budget.
Budget deficit => G > T
Budget deficit increase => G increase => S decrease
This shifts the S-I curve to the left, leading to an increase in interest rate.
Savings - Investment = Net Exports
S - I = NX
(Y - C - G) - I = NX
( (Y + T - C) + (T - G) ) - I = NX
T - G represents the government's budget.
Budget deficit => G > T
Budget deficit increase => G increase => S decrease
This shifts the S-I curve to the left, leading to an increase in interest rate.
