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The united states as a global borrower

In the global economy, trillions of dollars of financial investment cross national borders every year. In the early 2000s, financial investors from foreign countries were investing several hundred billion dollars per year more in the U.S. economy than U.S. financial investors were investing abroad. The following Work It Out deals with one of the macroeconomic concerns for the U.S. economy in recent years.

The effect of growing u.s. debt

Imagine that the U.S. economy became viewed as a less desirable place for foreign investors to put their money because of fears about the growth of the U.S. public debt. Using the four-step process for analyzing how changes in supply and demand affect equilibrium outcomes, how would increased U.S. public debt affect the equilibrium price and quantity for capital in U.S. financial markets?

Step 1. Draw a diagram showing demand and supply for financial capital that represents the original scenario in which foreign investors are pouring money into the U.S. economy. [link] shows a demand curve, D, and a supply curve, S, where the supply of capital includes the funds arriving from foreign investors. The original equilibrium E 0 occurs at interest rate R 0 and quantity of financial investment Q 0 .

The united states as a global borrower before u.s. debt uncertainty

The graph shows the supply and demand for financial capital that includes the foreign sector.
The graph shows the demand for financial capital from and supply of financial capital into the U.S. financial markets by the foreign sector before the increase in uncertainty regarding U.S. public debt. The original equilibrium (E 0 ) occurs at an equilibrium rate of return (R 0 ) and the equilibrium quantity is at Q 0 .

Step 2. Will the diminished confidence in the U.S. economy as a place to invest affect demand or supply of financial capital? Yes, it will affect supply. Many foreign investors look to the U.S. financial markets to store their money in safe financial vehicles with low risk and stable returns. As the U.S. debt increases, debt servicing will increase—that is, more current income will be used to pay the interest rate on past debt. Increasing U.S. debt also means that businesses may have to pay higher interest rates to borrow money, because business is now competing with the government for financial resources.

Step 3. Will supply increase or decrease? When the enthusiasm of foreign investors’ for investing their money in the U.S. economy diminishes, the supply of financial capital shifts to the left. [link] shows the supply curve shift from S 0 to S 1 .

The united states as a global borrower before and after u.s. debt uncertainty

The graph shows the supply and demand for financial capital that includes the foreign sector.
The graph shows the demand for financial capital and supply of financial capital into the U.S. financial markets by the foreign sector before and after the increase in uncertainty regarding U.S. public debt. The original equilibrium (E 0 ) occurs at an equilibrium rate of return (R 0 ) and the equilibrium quantity is at Q 0 .

Step 4. Thus, foreign investors’ diminished enthusiasm leads to a new equilibrium, E 1 , which occurs at the higher interest rate, R 1 , and the lower quantity of financial investment, Q 1 .

Questions & Answers

what is economics
BUKENYA Reply
economics us behavior. Of people, nations, markets etc. It has much to do with reactions. watch MSNBC. Bloomberg. everyday they talk about how the markets react to an piece of news, legislation, interest rates etc. Interesting volatile stuff
TOM
but, it also react with science
ezhilarasan
economic is a science with study's the behavior of people,market and price
Bertilla
it's a science which study the behavior of people ,market n price
Bertilla
who is the father of economic
Yirtutey Reply
Adam smith
shaikh
modern father is Adam smith
Bilal
Adam smith
Nazifi
what is backward bend
Florence Reply
It's a curve that reverses direction
Ajibade
Good evening friends
Kojo
Evening
Ajibade
evening
Emmanuel
hi
Lawrence
Any Nigerian lady to meet here Well on eco ground
Suleiman
Good morning ooo I hope everyone is fine
Kojo
hello
James
yeah
Kojo
how?
Kojo
how time
James
cool
Kojo
Ok
James
Good morning
Junior
morning all
Emeka
Morning
Ajibade
😶g
Maaz
moaz taha u r egyptian aren't u ?
Marwa
marwa no
Maaz
how economic effect the Market
Abdikarem
what is the difference between statistic and statistics?
Shafiu
it can can be described as when the demand is insufficient
Amaan Reply
high Dublin divino through Higginbotham
Shubham Reply
How does exchange rate affect the demand and supply?
austine
You mean demand and supply of currency ?
Jahangir
Hello
Hann
Hi
Jahangir
Am debby
Hann
am jahangir
Jahangir
how are you
Ogunsola
I am All fine Wbu ?
Jahangir
doing great
Ogunsola
Hw r u all
Mudassar
Am gud
Hann
Gd
Mudassar
Ogunsola
are you help for your country of economy leavel
Mutha
hi
Hammed
Hello
Assan
hi
Pranshi
Hello
Kamal
hi
Pranshi
hi
Abbas
hi
Abdirazak
ki sah botine
Neyshawn
hi
Nasir
Hello Economist
Nasir
hello
Victor
Hie... may anyone give me examples of countries that successfully implemented import substitution industrialisation.
Thabo
Nigeria
Junior
hey I'm emma from Uganda
niwagaba
Hello
Abraham
What is the difference between Demand and Quantity Demanded?
Weedh
Demand refers to how much a product is desired by buyer mean while quantity demanded refers to the amount of product a buyer is willing to buy at a certain price.
Junior
Good evening
Ajibade
Evening
Junior
evening
Ogunsola
someone wat is d textbook to read for banking and finance course
ayomide
Evening
Anjorin
Hw r u doing
Faku
yh
Benj
I'm good, u?
Anjorin
demand is the various quantity of goods or services a consumer is Willing and able to buy at a particular price over s given period of time while quantity demanded is the amount of goods or services being paid for
Florence
Good
Awudu
1.it allows producers to learn and invent 2.it allows agent to take advantage of economic scale 3.it allow agents to focus in areas of
oyebola Reply
can someone explain the motive of money to me?
Alemogho Reply
ask the question you don't know
ojo
opportunity cost
Sylvo
the motive of money is to pay for goods or services. it's also for transaction purposes bet it ordinary or unforseen
Silke
Money helps to reduce our scarcity problems. It can satisfy your wants to an extent
Okwori
How dose economics use science methods to explains it problems
Edmond Reply
according to Jhon Robinson the main problem of economics is what to produce? how to produce? whom to produce? economics tries to solve these problem scientifically by using its theories which are scientific in nature,basically micro and macro theories which just explain what the problem is...
Lavkesh
and now the solving techinique is also changed. only theories or its matematical +statistical version is not sufficient so the economist had developed Econometrics which includes economic theory+mathematical economics+statistics, for solving economic problem. This method treats economics as a pure
Lavkesh
..pure science so this technique is based on pure scientific methods.
Lavkesh
Economics is the scientific study of human behavior so there for science is used to solve economics problems using economics theories
Florence
economic is not higly subject of taminadu ...
Mutha
measurement of elasticity of demand
John Reply
Price elasticity of demand= Percentage change in quantity demanded/ Percentage change in price
Jale
For example, suppose that a 10 percent increase in the price of an ice-cream cone causes the amount of ice cream you buy to fall by 20 percent. We calculate your elasticity of demand as
Jale
Price elasticity of demand =20 percent /10 percent = 2
Jale
In this example, the elasticity is 2, reflecting that the change in the quantity demanded is proportionately twice as large as the change in the price.
Jale
what is economic
Samuel Reply
economics is a social science that studies the relationship of human behavior between ends and scare...
Lawrence
Why is economics as a subject is so important to human being?
austine
it's significant in study of managing available resources to satisfy human needs and wants
mohamed
economics is the science of wealth
Aamir
it is also said that it is the science of scarcity
Aamir
why study economic
Neo
Economic helps to meet our needs and wants nd to make choices.
Abraham
careers or jobs associated with economics
Neo
Economics is more than choices, scarcity, resources etc. It has a lot to do with psychology, social psychology. Understand motivation for consumer decisons.
TOM
okey
Neo
I what to study economic understand education what subject will I take in my jamb
DIRIOHA
English.mathematics.economics and one other social science subject
Ogunsola
economic is life start to end
Mutha
Plz help in lectures job for economics
Mudassar
acc to robbin . "Economics is a science that studies human behaviour as a relationship between scarce means and ends which have alternative uses"
Jahangir
Economics is important to man "human wants are insatiable
Hann
How does commercial banks create credit
Penda Reply
what is equilibrium price?
Stella Reply
happen when demand curve and supply curve meet
Enockz
intersection point of demand and supply curve
Sarjeel
the equilibrium price is that price at which the quantity demanded is equal to the quantity supplied... i.e the price at which what people want to buy is equal to what the sellers want to sell.
Che
what is difference between demand and quantity demand
Sarjeel
the price which is prevailing in the market ,it is the price at which the consumer is getting maximum satisfaction and the producer is getting maximum profit.
Rather
at equilibrium price demand for commodity is equal to supply of commodity..
Rather
dear sareel, quantity demand means the quantity of commodity which is demanded at a particular price e,g , your demand is for 4 oranges when price of orange is 5,, on the other hand demand means the whole quantity price relationship, quantity demand is shown on a particular point on demand curve,
Rather
sarjeel sbb, reply please...
Rather
what is elasticity of demand
Evans
what is Economics?
Ahmed
Economics can be defined as a social sciences that study human behavior as a relationship between end and scarce mean which have alternative use
Azeez
What is taxation
Azeez
economics is the study of scarcity
Suleiman
dear Suleiman how?
Enockz
economics is a subject matter that studies different economic activities as directed towards maximization of income at level of individual and maximization of social welfare at the level of society as a whole
Rather
economics studies us how to allocate scarce resources to full fill the maximum human wants as the resources have alternative uses..and r very scare to fullfill the human wants as the wants of humans are unlimited
Rather
demand is what a buyer is able and willing to buy at a specific price where by quantity demanded is amount of demand the buyer is able and willing to buy at a specific price.
daudi
thanks che..
Stella
how does commercial banks create credit
Penda
write models of Aggregate Supply?
abdi Reply
models of aggregate supply?
abdi
Then what's the law of elasticity?
austine
wat happen if money circulation failed to be controlled in any county?
Enockz Reply
the amount of money in circulation increases and cause aggregate demand to rise. Thus, hyperinflation.
Che
what's heteroscandacity
Crowther
price mechanism refers to the manner which price of goods and services affect the demand and supply of goods and services
Abaide
heteroscandacity: Is the circumstance where there is unequal variances across the observations.
Enockz
what is price mechanisms?
Che Reply
price mechanism refers to the manner which price of goods and services affect the demand and supply of goods and services
Abaide

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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