Assume the Federal government runs a budget deficit in the current fiscal year.
ID: 1206049 • Letter: A
Question
Assume the Federal government runs a budget deficit in the current fiscal year.
i. How can the Federal government fund the deficit?
ii. If the Federal government decides to issue U.S. Treasury securities to fund the deficit, what happens to the level of national debt, all else held constant?
iii. Assuming the Federal government and firms compete for the same savers’ dollars in the loanable funds market, what is likely to happen to interest rates?
iv. Given your answer in (iii) above, is crowding out more or less likely to occur if the deficit is funded by Treasury securities? Explain.
Explanation / Answer
1_ By borrowing money, and issuing bonds
2) It will decrease
3) This will increase
4) More to occur. because no one will want to pay full rate for something thatwill return lower than face value in the end, due to higher interest rate