can you answer this question? (1 Viewer)

[LoanWoolfq]

Compare the impact of TWO different methods of financing a budget deficit on domestic interest rates in the Australian economy.
Asked in 3 papers i have seen!

thoughts, ideas and tips about what would make a B6 response would be great

 

[Fabrizio]

is that an extended response question?

 

[LoanWoolfq]

sorry, no 4 marks

 

[#RoadTo31Atar]

I don't remember this very well but I think it's stuff like:

1. Sterile intervention is where domestic money supply is not changed

2. Non sterile intervention is where domestic money supply is affected

In the first one domestic interest rates are not changed and thus a deficit has no effect on the components of AD

In the second FOREX is not offset by domestic transactions(or something like that) and domestic interest rates are affected because domestic money supply is decreased.

There is a also another method of financing called bond financing which is not sterile and can lead to a 'crowding out effect' as funds leave the private sector to be loaned to the public sector.

Australia has always done sterile intervention AFAIK

 

[LoanWoolfq]

I don't remember this very well but I think it's stuff like:

1. Sterile intervention is where domestic money supply is not changed

2. Non sterile intervention is where domestic money supply is affected

that is for Monetary polcy.
last part is good!
thanks...
anymore anyone... feel free to say

 

[Fabrizio]

Was about to say that is the ugliest question i have ever seen.
Just do domestic borrowing and international borrowing.
For domestic you would explain how they do it (selling treasury bonds under the tender system), then how the crowding out effect will increase domestic interest rates due to increased demand for funds due to Australia small population and thus savings pool. Alternatively, they could borrow overseas which has no influence on the demand for domestic funds and thus no effect on domestic interest rates. And then you explain how this increases foreign debt and you could introduce the Twin Deficit Hypothesis briefly

 

[LoanWoolfq]

Was about to say that is the ugliest question i have ever seen.
Just do domestic borrowing and international borrowing.
For domestic you would explain how they do it (selling treasury bonds under the tender system), then how the crowding out effect will increase domestic interest rates due to increased demand for funds due to Australia small population and thus savings pool. Alternatively, they could borrow overseas which has no influence on the demand for domestic funds and thus no effect on domestic interest rates.

exactly what i wrote out.
But what about monetizing the deficit; as in mullah($) straight from RBA, does this increase rates or decrease?

 

[#RoadTo31Atar]

,

 

[Fabrizio]

I would avoid that one because no governments really use it any more unless they need to. But in theory it would increase the money supply and thus put upward pressure on domestic interest rates

 

[LoanWoolfq]

great stuff ppl. best of luck.

hows ur studying going in genera;l?

 

[#RoadTo31Atar]

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