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

Question

Quizplus · Accepted Answer

When the government runs larger budget deficits, it borrows 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 Larger Budget Deficits, Then