If the budget deficit increases then
A)saving and the interest rate rise.
B)saving rises and the interest rate falls.
C)saving falls and the interest rate rises.
D)saving and the interest rate fall.

Question

Quizplus · Accepted Answer

When the budget deficit increases, the government has to borrow more money, which increases the demand for loanable funds. This leads to a decrease in the supply of funds available for private investment, causing interest rates to rise. As interest rates rise, borrowing becomes more expensive, which dissuades individuals from borrowing and instead favors saving. This decrease in demand for borrowing and increase in supply of saving causes the equilibrium interest rate to rise further. Therefore, saving falls and the interest rate rises.

If the Budget Deficit Increases Then