Part II - Essay and Analysis (55 points) 1. A recent WSJ article (\"Low Yields H

Question

Part II - Essay and Analysis (55 points) 1. A recent WSJ article ("Low Yields Help U.S. Tame Borrowing Costs", June he low yields wil1 benefit the U.s. government, which is planning to sell $1.7 trillion in debt to cover a forecast $1.7 trillion federal deficit in the current year to Sept. 30. a.) Explain ceteris paribus (i.e., no change in GDP), the impact, if any, such a shift in borrowing costs (if sustained) would have on the size of the total U.S. government budget deficit, the natural employment (structural) deficit, and the cyclical deficit. Be sure to use the so- called Budget Line framework of Gordon Chapter 5 Discuss the effect such a change in borrowing costs would have on the domestic investment, interest rates and foreign borrowing needs of the U.S. Be sure to use the National Savings/Investment framework of Chapter 5. b.)

Explanation / Answer

a) When the USA borrowings increases it leads to increase in the budget deficit. Hence deficit leads to the increase in the tax burden. Goverment issues bonds ad treasury bills and with the money the goverment receives leads to finance the debt. The level of employment decreases in the country which leads to cyclical deficit.

b)Now borrowing extra dollar costs more than the previously borrowing. The interest rate on lonable funds increases and private investment reduces.

c)Due to budget deficit exports must increase than imports to reduce the effect of budget deficit.

d) Due to policy change the USA currency depreciates in order to increase the exports and decrease the amount of imports.

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