Question

a) Explain the impacts of an increase in the budget deficit and increase in money supply on goods, money and bond markets equilibrium

b) Using 1S-LM-bb figure, explain why the bond market curve (bb curve) is positively sloped and relatively flat.

Answer 1

[6/23, 4:35 PM] Kavita Ma'am: a) The impact of the budget deficit and increase in money supply on goods, money and bond markets equilibrium:-

The Budget deficit or Fiscal deficits are nega GVCtive balances that grow whenever a government spends more money than it brings in during the fiscal year.

A budget deficit is created when current expenses increase the amount of income received through standard operations. The budget deficit creates the inflation, which is the continuous increase of price levels. The prices of goods and services are increased due to the budget deficit.

The budget deficits crowd out private borrowing, manipulate capital structures and interest rates, decrease net exports and lead to higher tax rates.

Increasing the money supply will also cause a decrease in average interest rates, people have more purchasing power. Also demand of goods and services are increased and their prices are also increased. Also Bond markets equilibrium face imbalance.

[6/23, 4:39 PM] Kavita Ma'am: b)The bond market curve is a line that shows interest rates of bond having equal credit quality but different maturity.The bond market curve is positively sloped and relatively curve because of longer term bonds may continue to rise according to the economic conditions.