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The effect of federal government budget surplus

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Suppose that, due to drastic cuts in federal spending and strong economic growth, it now appears that the federal government will experience a $100 billion budget surplus in its cash account at the Federal Reserve. It will use the balance to retire $100 billion in government securities. What would be some of the possible effects of this debt retirement operation on the economy and the financial markets?

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Solution Summary

This scenario has some similarities to when a corporation uses cash to buy back a portion of its stock.

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This scenario has some similarities to when a corporation uses cash to buy back a portion of its stock. In this case, the price of the current bonds will immediately increase due to the sudden greater demand to buy the bonds. This also will send a message ...

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