Question

Suppose because of the global Corona pandemic, the US and UK budget deficits increased dramatically. Since developed countries are the leading suppliers of funds to the world financial; markets, explain, using the supply and demand analytical framework, what would likely happen to world interest rates after the pandemic.

Answer 1

Due to the impact of the global Corona pandemic, the US and UK budget deficits are increased dramatically. When the government expenditure will increase, the budget deficit and the treasury must issue more bonds and this causes reduce in price of bonds and rise in interest rates.

The Budget deficit or Fiscal deficits are negative balances that grow whenever a government spends more money than it brings in during the fiscal year.

A budget deficit is created when current expenses increase the amount of income received through standard operations. The budget deficit creates the inflation, which is the continuous increase of price levels. The prices of goods and services are increased due to the budget deficit.

The budget deficits crowd out private borrowing, manipulate capital structures and interest rates, decrease net exports and lead to higher tax rates.