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effects of Treasury borrowing

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Suppose that, due to an unexpected decline in federal income tax collections, the Treasury is compelled to borrow an extra $40 billion to cover planned expenditures in the current government budget. What would be some of the possible effects of this additional borrowing on the financial markets and the economy?

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Having to sell more government bonds will decrease the price of the current bonds as there is now more supply of bonds available. But to persuade bond holders to take this extra supply of bonds, the government most likely will have to offer higher interest rates ...

Solution Summary

Having to sell more government bonds will .....

$2.19