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Economics Today
Found in: Page 319

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Short Answer

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 collections 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 the 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?

a. To induce foreign residents to buy the bonds the return on bonds should increase

b. The most important source of dollars to buy them is the export of goods and services to the U.S.

See the step by step solution

Step by Step Solution

Step 1 : Introduction

Whenever returns on federal government bonds rise, the interest for government bonds by unfamiliar occupants rises. To make government bonds more alluring to the unfamiliar inhabitants, the profits on government bonds should ascend higher than the profits on private bonds, both inside and outside the country.

Step 2: Explanation part (a)

At the point when the federal government issues securities to back its deficit spending through borrowings, it should rival the private area firms for the restricted assets accessible to the homegrown and unfamiliar inhabitants for loaning

Step 3: Explanation part (b)

Unfamiliar occupants request more dollars to fund their acquisition of U.S. government bonds. Accordingly, the U.S. dollar appreciates and different monetary forms deteriorate. Subsequently, sends out from outside nations to the U.S. rise. The subsequent expansion in the dollar income of the unfamiliar inhabitants comprises their most significant wellspring of dollars to purchase U.S. government bonds.

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