Suppose that the share of U.S. GDP going to domestic consumption remains constan

Question

Suppose that the share of U.S. GDP going to domestic consumption remains constant. Initially, the federal government was operating with a balanced budget, but this year it has increased its spending well above its collection of taxes and other sources of revenues. To fund its deficit spending, the government has issued bonds. So far, very few foreign residents have shown any interest in purchasing bonds.

a.) What must happen to induce foreign residents to buy the bonds?

b.) If foreign residents desire to purchase the bonds, what is the most important source of dollars to buy them?

Explanation / Answer

Intrest rates must rise

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