Question

the government starts to register the budget surplus after having paid off the large budget deficits incurred as the policy measured in part c)(fiscal ploicy). What happens to the quantities of saving and investment and (real) interest rates with this development? Explain in writing. Diagrammatic representation not required (Hint: try to explain the step by step).

Answer 1

The budget surplus is a position where the government earning is more than its expenditure. here in this case the government already paid off the debt and now it is having a surplus in its hand. this is a sign of a healthy economy. Now the government is in a better position to take place the developmental projects with positive savings. the quantity of savings is more now so the government can think of tax relaxation so that the economy will be more productive. The disposable income will be more and the purchasing power of consumers will increase, it will boost the demand. when the tax will be reduced there will be more savings for investment, which brings down the interest rate down. if the interest rate is low the investment will raise, the aggregate supply of product will shift .so the economy will attain a higher level of equilibrium with new quantity and price. so overall economy in a better position.