Question

DQ 1. What is the role of the financial system?

DQ 2. How are national saving, private saving and private saving related?

DQ3. What is a government budget deficit and how how does it affect interest rates, investment and

economic growth?

Answer 1

Answer 1: A financial system plays dominant role in the economy. A financial system function as a intermediary and facilitates the flow of funds from the areas of surplus to the area of deficit. It is the composition of various institution ,markets, regulations and law, practices,money managers analyst transaction and claim & liabilities.

Answer2: National saving is the sum up of public and private saving. Private saving us the amount of income that household have left after paying their taxes and paying for their consumption.

Public saving is the amount of tax revenue that the govt. Has left after paying it's spending .Thus national saving is equal to investment.

Answer 3: goverment budget deficit is the difference between all receipts and expenses in both revenue and capital account of the government. Similarly if the capital disbursement of the government exceeds capital receipts ,it leads to deficit.

A budget deficit implies lower taxes and increased goverment spending (G) ,this will increase AD and cause higher real GDP and inflation ..for example in 2009 the UK lowered VAT in effort to boost consumer spending ,hit by the great recession .. The government deficit is associated with an increase in long term interest rates .further as Interest rates rises bond prices fall, and govt raises money to cover the deficit ,through the sales of bonds ,higher rates raises the cost of borrowing. There will be crowding out negative consequences of budget deficit in which higher interest rates lead to less private investment ,higher exchange rates and fewer exports..