Eco question (1 Viewer)

[NubMuncher]

Which of the following is most likely to occur when a budget deficit is funded by selling
new government securities?
(A) Money supply will increase.
(B) Current account deficit will rise.
(C) Private sector borrowing costs will rise.
(D) Private sector investment levels will increase

The answer is C, but why? Thanks in advance

Also sorry if this is in the wrong place, other forum is kinda dead though xD

 

[Morgan1234pooki]

crowding out effect i suppose

 

[powlmao]

Which of the following is most likely to occur when a budget deficit is funded by selling
new government securities?
(A) Money supply will increase.
(B) Current account deficit will rise.
(C) Private sector borrowing costs will rise.
(D) Private sector investment levels will increase

The answer is C, but why? Thanks in advance

Also sorry if this is in the wrong place, other forum is kinda dead though xD

It is C because

When the government sells new securities 'money supply' is lowered, that is there is less money to borrow in the economy because the private sector has purchased these sercuities. Therefore the private sector raises interest rates to curve borrowing.

 

[NubMuncher]

It is C because

When the government sells new securities 'money supply' is lowed, that is there is less money to borrow in the economy by the private sector because they have purchased these sercuities. Therefore the private sector raises interest rates to curve borrowing.

Yes I agree, however doesn't a decrease in supply of money lead to an appreciation of the currency, which could lead to a deteriorating CAD? Not sure if it works like that haha xD

 

[abc123yoyo]

Which of the following is most likely to occur when a budget deficit is funded by selling
new government securities?
(A) Money supply will increase.
(B) Current account deficit will rise.
(C) Private sector borrowing costs will rise.
(D) Private sector investment levels will increase

The answer is C, but why? Thanks in advance

Also sorry if this is in the wrong place, other forum is kinda dead though xD

If u sell new government securities u r taking money away from the public because they are spending their money buying government bonds n stuff. This means their is a decrease in the total amount of money or M3 circulating the domestic economy. From the demand for loanable funds/ M3/ interest rate diagram a decrease in M3 will result in an increase in interest rates - if u have higher interest rates then the cost to borrow would rise. The answer isnt (d) because i think u can presume that u r not talking about this on an international level and also because c is more correct. a and b are both wrong

 

[powlmao]

Yes I agree, however doesn't a decrease in supply of money lead to an appreciation of the currency, which could lead to a deteriorating CAD? Not sure if it works like that haha xD

Yes but that is more to do with exchange rates. This is more related to the domestic level so exchange rates aren't really considered a factor.

The question really is just about the effects of monetary policy.

 

[NubMuncher]

Yes but that is more to do with exchange rates. This is more related to the domestic level so exchange rates aren't really considered a factor.

The question really is just about the effects of monetary policy.

That's just ridiculous xD but i guess the crowding out effect is a better answer and is hence the correct answer Thanks!

 

[Morgan1234pooki]

haha glad to have helped!

 

[powlmao]

That's just ridiculous xD but i guess the crowding out effect is a better answer and is hence the correct answer Thanks!

What is ridiculous?

I never heard of the crowding out effect before, it looks interesting.

 

[Morgan1234pooki]

sort of when the private sector is effectively crowed out of the market because of increased government borrowing

 

[NubMuncher]

What is ridiculous?

I never heard of the crowding out effect before, it looks interesting.

Just a fancy way of describing what you are saying haha like Morgan said

 

[powlmao]

Just a fancy way of describing what you are saying haha like Morgan said

haha

I am going to have fun next year in yr 12 economics

 

[mitchh81]

Yes I agree, however doesn't a decrease in supply of money lead to an appreciation of the currency, which could lead to a deteriorating CAD? Not sure if it works like that haha xD

but a sustained appreication would be good for our CAD because it reduces our net income deficit ?? is that right ?

 

[determine]

Yes, the crowding out effect is the answer to this question.