Consider a closed-economy AD/AS model.If an increase in the government's budget deficit drives up market interest rates,

Question

Quizplus · Accepted Answer

When the government's budget deficit increases, it borrows more money which increases the demand for loanable funds in the economy. This pushes up market interest rates as lenders will demand higher rates to lend out their money. As a result, some private investment expenditure will probably be crowded out as borrowing becomes more expensive, reducing the level of aggregate demand. Therefore, choice D is the best answer.

Consider a Closed-Economy AD/AS Model