Suggested Solutions for Tutorial 11

Suggested Solutions for Tutorial 11 - 1 Suggested Solutions...

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1 Suggested Solutions for Tutorial 10 Please note that following suggested solutions are only very basic points and you need (b) 1. (b) Explain why the Commonwealth government issues Treasury bonds into the capital markets. In your answer, discuss Treasury-bond-related issues of fiscal policy and economic activity. all governments need to fund their capital expenditure programs fiscal policy relates to the annual incomes and expenditures of a government if government income, from taxes and other sources, exceeds forecast expenditures the budget is said to be in surplus; if expenditures exceed income the budget is in deficit accumulated deficits need to be funded through the issue of Treasury bonds fiscal policy impacts economic activity, investment and the business cycle changes in budget outcomes affect interest rates, exchange rates, and the flow of funds within the markets as government demand for debt funding fluctuates when the government deficit is high, the government demand for debt funding will reduce the amount of funds available for investment in the business sector and therefore limit growth within the economy: this is the so called crowding-out effect The current government policy of budget surpluses and government debt reduction has introduced an unusual situation into the markets: there was concern that the reduced supply of government securities may result in there not being an adequate quantity of the paper to meet the market’s demands to resolve this situation, the government maintains a debt issuance program in Treasury bonds this program will ensure there are sufficient Treasury bonds on issue to maintain a liquid market the current global sub-prime/credit/economic crisis may result in the Australian government returning to a period of budget deficits, thereby issuing more Treasury bonds
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This note was uploaded on 08/30/2011 for the course AFF 1000 taught by Professor Chalmers during the Three '11 term at Monash.

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Suggested Solutions for Tutorial 11 - 1 Suggested Solutions...

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