Question

How can you explain the Sub-prime mortgage by the twin- deficit? Include 4 graphs regarding the personal saving, national saving, budget deficit, and investment in your answer.

Answer 1

Ans: A sub-Prime mortgage is a type of home loan or a loan against property to those individuals who are having low credit score or in other words they are having lower income to support there loans and because of the same the rate of interest on these loans are more as compare to normal mortgage to the individuals which is known as sub-prime mortgage ad it use to carry a higher rate of risk to default and may cause a risk to a economy.

A sub-Prime mortgage by twin deficit means we have the option to set off the effect or reduce the risk associated with it.They are

1)Fiscal Deficit : Its a tool used by the government where the expenses are in excess of revenue i.e they are spending more to create jobs at the state level so as to reduce the unemployment rate which may create default on loans that is the government income is say $10,00,00,000 and there expenditure is $11,00,00,000 so there is a deficit budget of 1,00,00,000 .But in long term a country need to maintain a balance so as maintain the economy.

2) Current Account Deficit :When a country is importing more goods and services than its exports then it is called a current account deficit means your total receipts of external trade is less than what it need to pay externally to the world for example the country is importing goods and services worth $1,00,000 and exporting worth $80,000 then there is a deficit of $ 20,000.On one side it helps in keeping a control over the inflation as there are more products and services are there providing alternative to the customer and maintaining a control over the inflation but in long run it causes the exporting countries to put pressure on a country externally.

Now we will see the effect of sub prime mortgage on the four components i.e

A) PERSONAL SAVINGS.

B) NATIONAL SAVINGS.

C) BUDGET DEFICIT.

D) INVESTMENT.