If the government begins to run a larger budget deficits, then assuming there is no Ricardo -Barro effect, the demand for loanable funds and the real interest rate .
A) decreases; falls
B) increases; falls
C) increases; rises
D) decreases; rises

Question

Quizplus · Accepted Answer

When the government runs a larger budget deficit, it needs to borrow more, increasing the demand for loanable funds. This increased demand typically leads to a rise in the real interest rate.

If the Government Begins to Run a Larger Budget Deficits