A/ ASSIGNMENT RECAP

● Write a 1000 word analytical report examining the money and debt markets of an assigned developed Asia-Pacific country,

● Answering questions on government budget balances and monetary policy

● Comparing payment systems and bond yields between the country and Vietnam in order to recommend an investment.

Structure:

           I.     Question 1 (Suggested 400 words)

         II.     Question 2 (Suggested 600 words)

B/ KEYWORD EXPLANATIONS

1.                    Government Budget Balance

The difference between government revenue and spending over a fiscal year. Surplus if revenue exceeds spending; deficit if spending is higher. Budget balances indicate whether the economy is strong with extra government money or weak with debt funding needed.

2.                    Monetary Policy

Central bank actions to regulate money supply, interest rates, and inflation through tools like open market operations and reserve requirements.

3.                    Payment System

A country's payment system refers to the entire infrastructure and set of arrangements in place to facilitate the transfer of funds or value between individuals, businesses, and institutions within that country. It plays a crucial role in the functioning of the economy and the financial system.

4.                    Treasury Bonds

Treasury bonds, also known as T-bonds, are long-term debt securities issued by the government to raise funds. These bonds have a fixed interest rate and a maturity date, typically ranging from 10 to 30 years. Investors purchase Treasury bonds, and in return, they receive periodic interest payments and the bond's face value at maturity.

5.                    Treasury Rates

Treasury rates, often referred to as Treasury yields or yields on Treasury securities, represent the interest rates paid on government debt securities, including Treasury bills, notes, and bonds. These rates are determined by the market and fluctuate based on supply and demand dynamics and economic conditions.

6.                    Bond Yield

Bond yield refers to the annual income an investor can earn from a bond investment, expressed as a percentage of the bond's face value. It represents the return an investor can expect to receive from the bond, considering both interest payments and potential changes in the bond's market price.

D/ DETAILED OUTLINE

Question 1

a.                    Government Budget Balance Analysis (200 words)

-   Begin by clearly stating the country you have been assigned to analyze

-   Gather data on the government budget balances for the years 2021 and 2022. You can obtain this information from official government websites, central banks, or reputable economic databases.

-   Calculate the government budget balance for each year by subtracting total government expenditures from total government revenues (Budget Balance = Total Revenues - Total Expenditures)

-   Analyze the reasons behind the government budget surpluses or deficits for each year.

+  Surpluses may result from:

● Higher revenues (e.g., increased tax collection)

● Lower expenditures (e.g., reduced government spending)

+  Deficits may result from:

● Lower revenues (e.g., economic downturn affecting tax revenues)

● Higher expenditures (e.g., increased government spending during a crisis)

Example:

-   The assigned country for this analysis is Germany.

-   In 2021, Germany's government reported a budget surplus of €45 billion, while in 2022, it recorded a deficit of €30 billion (German Ministry of Finance n.d.)

-   The government budget surplus in 2021 can be attributed to robust tax revenues, prudent fiscal management, and lower-than-expected expenditures due to pandemic-related relief programs ending.

-   In contrast, the deficit in 2022 was primarily caused by increased public spending on infrastructure projects and social welfare programs aimed at stimulating economic recovery post-pandemic. Additionally, a dip in tax revenues due to economic challenges contributed to the deficit."

b.                   Influence on Monetary Policy

-   You can consider the following point for your analysis

+  Impact of Budget Surpluses on Monetary Policy:

● If the government runs surpluses, it can reduce its borrowing needs, potentially reducing demand for loans and putting downward pressure on interest rates.

● Lower interest rates can stimulate investment and consumer spending, which may be a goal of monetary policy to spur economic growth.

● The central bank might respond by adjusting its policy rates (e.g., lowering the benchmark interest rate) to support the government's economic objectives.

+  Impact of Budget Deficits on Monetary Policy:

● Large deficits can increase government borrowing, which may raise interest rates due to higher demand for loans, potentially crowding out private sector borrowing.

● Higher interest rates can be a concern for controlling inflation, and the central bank may respond by tightening monetary policy (e.g., raising interest rates) to curb inflationary pressures.

● The central bank's actions to stabilize inflation and manage interest rates can influence the broader economy.

-   You should include real data about any indicators mentioned in your analysis and cite academic sources to support your statement