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.

Answer 1

Answer:

Increase in Budget Surplus would be there when

-The government of Cantania stops borrowing from foreign nations.

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

Increase in the Budget deficit would be there when

-Interest rates in Catania rise

-Cantania's government increases its demand for financial capital

Explanation:

As an increase in budget surplus occurs, more financial capital is made available to the government. The government will thus no longer have to borrow from outside sources, and more funds become available for private investment.

When there is an increase in the budget deficit, the government requires more financial capital, so there will be an increase in quantity of financial capital demanded. Interest rates are likely to rise as a result of the higher competition for financial capital.