Week 8 Econ

a . A budget deficit will exacerbate the effects of a high public debt as deficits are financed primarily by borrowing . The rise in interest rates will discourage private investments , thereby leading to a lower capital output , wages , and aggregate income . Attempts at increasing tax rates for debt servicing can lead to inefficiencies which can further lower output . A lower national income and a higher fraction of national income allocated for debt servicing will ensue

b . A balanced budget will tend to produce the same effect on economic aggregates as the preceding year

as there will be no debt increase or decrease . There will be no notable changes in interest rates , output and wages arising from the public debt . However , a persistent budget balance condition will lead to permanent debt interest payments

c . A budget surplus can be used to pay off a portion of the public debt Inflationary tendencies associated with debt financing will , therefore be lessened . The increase in money supply will tend to lower interest rates and increase investments . Aggregate demand will likewise increase Necessary interest payments may also decrease as a result of the good economic outlook

a . A federal reserve note is counted in M1 , as it is part of coins and notes in circulation

b . A 500 time deposit is an M2 component , being a small time deposit . A small time deposit is one which is less than 100 ,000

2 . c . Traveler 's checks are an M1 component

2 . d . A money market deposit account is an M2 component

Week 8 Coursework...