Budget Deficit

Introduction Budget deficit is the measure of how much the total government expenditure exceeds the total amount of revenue and always measured yearly while public borrowing on the other hand is the measure of the total amount owed by the government. It is also referred to as the national debt (Bohn, 2008). Government spending has two branches that is discretionary spending and mandatory spending. Discretionary spending is where it is optional and implemented by the congress while mandatory spending built in the budget as required by law. Question one The two mentioned above have played a great role in changing prevailing levels of unemployment and gross domestic product. Fiscal policy further elaborates

From the above graph, we can see that due to the continuous borrowing by the government the interest rates would continuously go up leading to many investors not borrowing because of high payback interest rates. The high interest rates on the other hand would favor the savers because of the higher rates of return from their savings. This is be denoted by the rise of interest rates from I1 to I2.
Question three
An increase in the interest rate have significant effects on the savers, firms, employment numbers and Gross Domestic Product as elaborated in the following ways. (Feldstein, 2007). An increase in the rate of interests would have a positive effect on the number of savers. When interest rates are increased it follows that there would be high level of cost during the repayment period. Due to this it would mean that majority of the people in the given economy would have less desire to save because they would incur high rates of loan repayment. From the classical economists saving is always a function of interest rate and it has a directly proportional relationship with the saving. At high interest
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rates, most of the people would decide not to borrow but rather save the little that they

This is as observed from the illustration of the above graph. At high interest rates, there is low aggregate demand for money and this means that at high interest rates few people are willing to borrow more money. Because of the high interest rates, the majority of people would opt to saving rather than borrowing. This would leads to a lower rate of investment and this implies that the number of firms would reduce. Thus, we can see that at higher interest rate there is a lower incentive to borrow and invest. On the other hand, at lower interest rate there is a higher incentive to borrow. The money borrowed by the various people can take to the investment sector. This means that the number of firms would greatly increase due to the high number of people investing in various sectors. From this, we can clearly see that interest rates have an inverse relationship with the number of firms. Another effect of the increase in interest rates is in the effect on the employment numbers. Employment in many cases depends on the rate of investment in a given economy. The amount of investment in the given economy is highly dependent on the rate of interest. At high levels of interest rate, various people would make low investments and rate of employment would go down. From this, we can see the rate of employment is inversely proportional to the amount