Between 1999 and 2009, the U.S. federal budget deficit moved from a record surplus to a record deficit. Other things being equal, the most likely effect of this shift would be:
A)higher interest rates and increased investment.
B)higher interest rates and decreased investment.
C)lower interest rates and increased investment.
D)lower interest rates and decreased investment.

Question

Quizplus · Accepted Answer

When the government runs a deficit, it borrows more, increasing the demand for loanable funds. This typically leads to higher interest rates, which can crowd out private investment by making borrowing more expensive for businesses and consumers.