Impacts of Gov Borrowing

Question 1

From the macroeconomic perspective, what are the three sources a Gov can borrow from?

Answer 1

1. Household savings
2. Firms borrowing less
3. Foreign countries

Question 2

What is the relationship must hold true between sources of demand and supply in the financial market?

Answer 2

Quantity of financial capital supplied must equal the quantity demanded

Question 3

What are the two main sources of financial capital within the US economy, and what is the function for Total Savings?

Answer 3

Private and Public savings

Total Savings = Private Savings (S) + Public Savings (T - G)

T = Net Taxes
G = Gov Spending

Question 4

Where does the supply of financial capital come from? Where does the demand for financial capital come from?

Answer 4

Supply of capital comes from private savings and the inflow of foreign savings

Demand of capital comes from private investment and government budget deficit

Question 5

S + (M - X) = I + (G - T)

What does this equation show, and explain each side of the equation

Answer 5

This equation shows that Private savings + Trade Surplus = Private Investment + Budget Deficit

Left is the financial supply consisting of Private Savings and the Inflow of Foreign Savings (imports - exports)

Right is the demand for financial capital consisting of Business Investment + Government Budget Deficit (Spending - Taxes)