14. When the federal government runs a budget surplus rather than a deficit, how will the...

14. When the federal government runs a budget surplus rather than a deficit, how will the public’s bond holdings and the supply of money be affected?

Expert Solution

Dear Student,

In following condition federal government runs a budget surplus rather than a deficit

1) By giving the discount rate to take loans

2) By keeping reserve ratio or reserve requirements in balanced or controled trend

3) buying and selling of government securities in the open market

Now if Fed wished to maintain constant FF rate in that situation the demand for excess reserves will definatly remain unchanged to react this decline in reserve requirement then by following ways open market trading desk should take decision :

1) It should lowers the amount of cash that banks are required hold in reserve

2) Allow banks to give loans to consumers and businesses requirement at lower interest rates

3) Adopt policies that will increases the overall nation's money supply

Supply of money:

Like any other commodity, if the supply of money increases, other things remaining the same the price of money—interest rates, go down.

There are situations wherein the investors do not have attractive avenues and they chase the bonds or deposits. If there is no demand for that money at that moment, then the interest rates go down.

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Rahul Sunny answered 6 months ago

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