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Question
Statistics
Posted 10 months ago
The government of Marthaland has a budget surplus.
What effect does this have in Marthaland on real interest rates and the value of Marthaland's currency in the short run and economic growth in the long run?
Choose 1 answer:
(A) Real interest rates decrease, Marthaland's currency appreciates, and economic growth decreases.
(B) Real interest rates increase, Marthaland's currency depreciates, and economic growth increases.
(c) Real interest rates decrease, Marthaland's currency isn't affected, and economic growth isn't affected.
(D) Real interest rates increase, Marthaland's currency depreciates, and economic growth isn't affected.
(E) Real interest rates decrease, Marthaland's currency depreciates, and economic growth increases.
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Answer from Sia
Posted 10 months ago
Solution by Steps
step 1
To analyze the impact of a budget surplus on real interest rates, we consider the loanable funds market. A budget surplus means the government is saving more, which increases the supply of loanable funds
step 2
An increase in the supply of loanable funds leads to a decrease in real interest rates, according to the supply and demand model for loanable funds
step 3
A decrease in real interest rates tends to make domestic assets less attractive to foreign investors, which can lead to a short-run appreciation of Marthaland's currency due to lower demand for foreign currency to invest abroad
step 4
In the long run, lower real interest rates can encourage investment in capital goods, which can increase productivity and economic growth
Answer
The correct answer, considering the effects of a budget surplus on real interest rates, currency value, and economic growth, is (A) Real interest rates decrease, Marthaland's currency appreciates, and economic growth decreases. However, the long-term effect on economic growth is typically positive, so there is a contradiction in the answer choices provided.
A
Key Concept
Budget surplus impact on loanable funds market
Explanation
A budget surplus increases the supply of loanable funds, which decreases real interest rates, can lead to currency appreciation in the short run, and typically promotes economic growth in the long run.
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