Question

Suppose a country was facing the problem of budget deficit and by reducing government expenditures the government has achieved the target of balanced budget. With the help of appropriate diagrams explain how a country’s shift from budget deficit to balanced budget would affect its investments, economic growth, net capital outflow and currency exchange rate?

Answer 1

Budget Deficit:-A budget deficit happens when expenses surpass revenue and specify the financial health of a country. The government commanly uses the term budget deficit when referring to spending rather than businesses or individuals. Arised deficits form national debt.

Balanced Budget:-A balanced budget is a position in financial planning or the budgeting proxedure where total revenues are equal to or greater than total expenses.

A county's shift from budget deficit to balanced budget would affect its investment, economic growth, net capital outflow and currency exchange rate :-

Many economists proclaim that moving from a budget deficit to a balanced budget decreases interest rates, increases investment, lower trade deficits and helps the economy grow rapid in the longer term.

The Net capital outflow will reduces because individuals will contrast the domestic interest rate to the foreign real interest rate. When the domestic rate increase, domestic households are more likely to purchase domestic assets and foreigners are likewise more likely to by domestic assets.

Two components are in play which connect a country's balance of payment and changes in the value of its currency: the market for all financial exchanges on the international market (balance of payments) and the supply and demand for a particular currency (exchange rate).

Diagram:-

yo GA Souzaga L Interest Rate Real Interest rate sl outlets Laureatment 0 Quantity of leanable Net Capital author Quantly of currency GA funds 4 Esschange pate Demand Quantity of currency