KK13 - Financing a Deficit/ Utilising a Surplus

Question 1

Financing A deficit - Using Accumulated Government Savings

Answer 1

Government can use up savings it has accumulated with the RBA

Question 2

Financing a deficit - Selling bonds to the RBA (borrowing money from RBA)

Answer 2

-The most expansionary and inflationary way to finance a deficit
-Isn’t used much as RBA is unwilling to buy bonds/securities

Question 3

Financing a deficit - Selling bonds to Australian Investors (borrowing from Aus investors)

Answer 3

-This is sound as money taken from the private sector actually returns when the government uses the money to cover outlays
-This leads to crowding out of the private sector
-Opportunity cost of borrowing money, private individuals are forced to undertake less expenditure and C, I decrease

Question 4

Financing a deficit - Selling bonds to overseas investors (borrowing from overseas)

Answer 4

-Results in capital inflows
This will result in capital inflows -> exerts upward pressure on the value of the AUD, -> negative impact on net exports and aggregate demand

Question 5

Problems with Budget deficits

Answer 5

-Require repayments of interest and principal -> burden to future generations
-Hinders ability to respond to economic shock (no savings)
-Can reduce credit rating if not paid back

Question 6

Financing a surplus

Answer 6

-Repay existing government debt
-leads to crowing in = government buys
bonds -> increases liquidity in financial
markets -> lower interest rates
-Build up savings balances with the RBA
-Add to investment balances in special saving funds (e.g., future fund)

Question 7

Benefits of surplus

Answer 7

-Offsets and reduce debt
-Build up funds to deal with economic crisis
-Protects credit rating
-Generates international confidence among investors