(a) What effects would an increase in government deficit have on the price of securities? (b)...

(a) What effects would an increase in government deficit have on the price of securities?

(b) What effect would a decrease in the money supply have on the price of securities?

Draw the appropriate graphs and explain.

Expert Solution

Part 1) An increase in the government deficit decreases the price of securities. This is because increase in government deficit means that government has increased its expenditure. Increase in government expenditure raises the level of income in the economy. For a given level of money supply, an increase in the level of income raises the transaction demand for money in the economy. People will now start to withdraw money from their speculative balances to finance their transaction needs. To keep the money market in equilibrium the interest rate will rise while the price of securities will decline.

As shown in the diagram below the increase in government expenditure causes the IS curve to shift from IS₁ to IS₂. The interest rate rises along the LM curve to keep the money market in equilibrium from r₁ to r₂.

Part 2) A decrease in the money supply will cause the price of securities to decline. This is because, for a given level of income, a decrease in the level of money supply raises the transaction demand for money in the economy. People will now start to withdraw money from their speculative balances to finance their transaction needs. To keep the money market in equilibrium the interest rate will rise while the price of securities will decline.

As shown in the diagram below decrease in money supply causes the LM curve to shift from LM₁ to LM₂. The interest rate rises along the LM curve to keep the money market in equilibrium from r₁ to r₂.

Rahul Sunny answered 2 years ago

Question 8 (a) What effects would an increase in government deficit have on the price of...

Question 8 (a) What effects would an increase in government deficit have on the price of securities? (b) What effect would a decrease in the money supply have on the price of securities? Draw the appropriate graphs and explain.

Effects of a government budget deficit

3. Effects of a government budget deficitConsider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the U.S. dollar. Assume that the economy is currently experiencing a balanced government budget.Screen Shot 2020-10-09 at 3.24.05 PM.pngGiven the information in the preceding table, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use...

If a government increases its budget deficit, which statement would best predict the effects? a. The real...

If a government increases its budget deficit, which statement would best predict the effects? a. The real exchange rate and domestic investment rise. b. The real exchange rate and domestic investment fall. c. The real exchange rate rises, and domestic investment falls. d. The real exchange rate falls, and domestic investment rises. 35. If the Bank of Canada conducts open-market purchases, how do the money supply and the aggregate demand change? a. The money supply increases, and aggregate demand shifts right. b. The money supply increases, and...

Some macroeconomists have argued that it would be beneficial for the government to run a deficit...

Some macroeconomists have argued that it would be beneficial for the government to run a deficit when the economy is in recession and a surplus during a boom. Does this make sense? Please explain why or why not. And if both are feasible please explain the benefits and negatives of both.

What are the income and substitution effects of an increase in the price of food, if...

What are the income and substitution effects of an increase in the price of food, if a person's preferences could be represented by the utility function U(F;C) = 2 (under root)(F) + C where F is her consumption of food and C is her consumption of clothing? I don't understand how to answer this without any numerical values

Effects of a government budget deficit Consider a hypothetical open economy.

Effects of a government budget deficit Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the U.S. dollar. Assume that the economy is currently experiencing a balanced government budget.Given the information in the preceding table, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol)...

a) What is the difference between government budget deficit and national debt? b) What is a...

a) What is the difference between government budget deficit and national debt? b) What is a sovereign debt crisis? Why do we need to look at the national debt as a percentage of country’s GDP instead of just in terms of trillions of dollars? c) Carefully explain why an increase in debt-to-GDP ratio would lead to a higher deficit? (You should describe 3 links connecting debt-to-GDP to deficit). Why is this a problem?

A deficit-financed increase in government purchases A. crowds out investment spending by decreasing interest rates. B....

A deficit-financed increase in government purchases A. crowds out investment spending by decreasing interest rates. B. crowds out investment by decreasing the exchange rate C. ...is this even in English???!!!! D. crowds out investment spending by increasing interest rates. E. has no negative impact on consumption or investment. F. crowds out consumer spending by reducing consumer incomes. G. crowds out investment by increasing the exchange rate

What is the effect of a government budget deficit on a) real interest rate and b)...

What is the effect of a government budget deficit on a) real interest rate and b) real exchange rate. Use the market for laonable funds and the market for foreign currency exchange in your answer. What are the negative effects of current US federal budget deficit? What are the positive effects? Argue.

Assume that an increase in government expenditure causes a larger budget deficit. Explain what will happen...

Assume that an increase in government expenditure causes a larger budget deficit. Explain what will happen to the DD curve as a result. Explain what will happen to the AA curve as a result. Answer with graphs.

Question