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The implication of a government budget surplus

Assess the implication of a government budget surplus on the following:

a. National saving
b. Interest rates
c. Private investment
d. Economic growth
e. Future living standards

When assessing the effects of the budget surplus, list the assumptions you are making.

Solution Preview

Assess the implication of a government budget surplus on the following:
(I'm just giving you ideas here - I can't directly answer the question. There are also different opinions on the concepts involved.)

a. National saving
This should rise, since the state is not taking in as much in taxes as before. This also boosts investor confidence, so there will be a greater demand for liquidity.

b. Interest rates
In the short term, these might go down, but the medium term might go up, since there is more demand for money. If savings rises, then, for a time, interest rates might be pushed downward. The Federal Reserve might keep rates low for the sake of boosting investment. A surplus will give more impetus ...

Solution Summary

The implication of a government budget surplus is determined.

$2.19