Question: 1

It can be determined that an amendment in the balanced budget of the U.S. Constitution would potentially have significant adverse impact on weak economies and push them towards recession and would be unbeneficial for the nation’s long-term fiscal policy. Furthermore, it could cause significant harm to the economy, creating huge challenges for operating social security and other primary federal functions. However, the serious problems caused by the amendment in the balanced budget includes;increase in the risk of pushing weak economies into recession which are long and deep and attribute towards destabilizing the country. Moreover, it would also result in loss of jobs, which would compel the policymakers to cut spending, which, in turn, would increase the tax rates including interest rates attributed to the weak economies facing recession. Therefore, the economy slumps and the federal revenue would decrease, in terms of growth rates, after which the spending in social programs including unemployment insurance, which in turn would increase the deficits. Hence, instead of stabilizing with lower tax collection and increased unemployment to off-set the effects of weak economy, the policymakers are compelled to reduce spending and increase taxes, which would adversely affect the economy and would lead to an increase in the deficits, which in turn would compel them to repeat the same procedure, which would further destabilize the economy.

Question: 2

There are two possible scenarios that could cause the saving outside U.S to shrink, whereas the investors in the United States market are not considering saving money outside the country and investing heavily within the country. This, as a result, would compel the policymakers to increase their spending and reduce taxes (including interest rates), gaining higher return from additional investment.

Finance task Harvard Case Solution & Analysis

Secondly, the other scenario is that the investors had lost confidence in the U.S. markets, attributed to the low return, which was gained from the markets. This, as a result, would decrease the overall purchasing power parity and income of the investors., which had compromised their ability to save money outside the United States. Moreover, it can be assessed that this economic downturn in the market could be attributed towards the interest rates.

Question: 3

It can be determinedthat only primary market deal with resources, as they deal in the trade of newly issued securities, whereas, the secondary markets only deal in the trade of those securities, which has previously been issued. Furthermore, it can be assessed that the money market instruments have maturities pertaining to a year or less, whereas, the capital market instruments have maturities pertaining to those securities that were previously issued and have not been transferred from surplus to deficit units. On the other hand, they also deal with newly issued securities that have been transferred from surplus to deficit units.

Question: 4

When one party has better information over the other, while making important decisions, it is known as Asymmetric Information. However, Asymmetric informationcreates an imbalance of power between the investors available in the market.......................

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