Question

The nation of Cantania regularly experiences changes in its national budget situation. In some years, Cantania operates with a budget deficit, while in other years it experiences a budget surplus. Please classify each of the possible consequences into the appropriate category of the budget circumstance most likely to cause them.

Category:
a. Cantania experiences an increase in budget surplus
b. Cantania experiences an increase in budget deficit

1. Cantania's government increases its demand for financial capital.
2. Interest rates in Cantania rise.
3. The government Of Cantania stops borrowing frorn foreign nations
4. More funds are made available for private investment in physical capital

Answer 1

Budget Surplus refers to a situation where the government's income exceeds its expenditure.

Budget Deficit is when the government's expenditure exceeds its income.

Budget Surplus

3. The government Of Cantania stops borrowing from foreign nations

The government would stop borrowing from foreign nations because they will have a surplus to fund what it is they need to fund without seeking excess capital.

4. More funds are made available for private investment in physical capital.

With the government in surplus, they will not need to borrow from the market which would leave enough funds for the private sector to borrow and invest in physical capital.

Budget Deficit.

1. Cantania's government increases its demand for financial capital.

The government would demand more financial capital to enable it fund the deficit.

2. Interest rates in Cantania rise.

Interests rates will rise as the government borrows funds because they will borrow a significant amount which would reduce the supply of loanable funds thereby increasing rates.