Question

What is investment? How is it related to national saving?

What is a government budget deficit? How does it affect interest rates, investment, and economic growth?

Answer 1

INVESTMENT

The term investments refer to the asset which is required with an objective to generate income. It is the purchase of asset which will be benefited for generating wealth in the near future. The purchase of machinery, building etc comes under investment. The major categories off investments are cash equitant, ownership lending and lending investments.

National savings includes the private savings as well as public savings. It is amount that is kept aside after meeting the expenditures in an economy. The amount is utilized for the overall development the nation. The national saving are used by the government for making investments in the country. the investments are made out of the savings of the nation. As the national savings i8ncreazse thee investment increase4s and thereby the growth of the country also increases.

GOVERNMENT BUDGET DEFICIT

The term budget deficit refers to the situation where the expenses of the government is higher compared to the income. The lower taxation and increase spending is the two major reasons for the occurrence of government budget deficit. Uncompensated deficit reasons to the increase in the debt for a government.

AFFECT OF GOVERNMENT BUDGET DEFICIT ON INTEREST RATES, ECONOMIC GROWTH AND INVESTMENT.

The need to increase the bond by the treasury increase as budget deficit occurs. It leads to the decrease in the price of bonds and it will later increase the rate of interest. The rising interest are decreases the amount of private investment demanded. It also results in increase in demand.

The budget deficit will reduce the overall investments in the country. The government cannot make investments without revenue. It weakens the overall growth of the country. Private as well as public investments will reduce due to the budget deficit.

The situation where government spending becomes higher than the income is known as deficit. There will be higher demand in the economy and as a result inflation occurs in the economy. The debt of the government will start increasing at this situation. The economy faces recession and lower economic growth.