In an open economy, a decrease in the government's budget deficit will ________ the domestic real interest rate and ________ the level of capital investment in the country, holding other factors constant.
A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase

Question

Quizplus · Accepted Answer

As the government's budget deficit decreases, more loanable funds are available to other borrowers and domestic real interest rates fall, causing private capital investment to increase.

In an Open Economy, a Decrease in the Government's Budget