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-(Figure: The Market for Loanable Funds III) Use Figure: The Market for Loanable Funds III. If the government in a closed economy is running a budget balance of zero when it decides to increase defense spending by $200 billion and then finances the spending by selling bonds, the equilibrium interest rate will:

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Use the following to answer questions: 
-(Figure: The Market for Loanable Funds III) Use Figure: The Market for Loanable Funds III. If the government in a closed economy is running a budget balance of zero when it decides to increase defense spending by $200 billion and then finances the spending by selling bonds, the equilibrium interest rate will:

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The increase in government borrowing will shift the demand for loanable funds to the right, causing the equilibrium interest rate to rise. The size of the shift is determined by the amount of the increase in government borrowing. In this case, the increase in government borrowing is $200 billion, so the demand curve shifts to the right by $200 billion at each interest rate. The new equilibrium interest rate is where the demand and supply curves intersect after the shift, which is approximately 18%.

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