Question

1. The new federal tax law is expected to increase the budget deficit. If this happens,...

1. The new federal tax law is expected to increase the budget deficit. If this happens, what is the likely impact on the interest rate that consumers will pay for car loans, mortgages, etc? Why?
2. Suppose you are the CEO of BMW and that you build most of your cars in Germany and export them to the USA. Generally speaking, do you prefer a strong US Dollar or weak US dollar? Why?

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Answer #1

1.A budget deficit is a situation when government's expected expenditure exceeds its expected revenue.Budget Deficit leads to increase in government's borrowings so as to meet its basic requirements.For attracting the investors in its borrowings it have to make its securities like T-Bills attractive ,which is done by increasing its interest rate.Also the government securities have direct relation with interest rates for loans to general public.Since government securities are basis for risk free investments the government have to increase the interest rate for loans to public.

In short in case of budget deficit , the interest rate for car loans , etc will increase.

2.Since I would be an exporter who sells its product to USA I would prefer strong US Dollar as it would increase my earning in home currency .

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