Over short-run periods during the past three to four decades, real interest rates appear to have fallen in the face of higher deficits rather than risen. How might this seeming contradiction best be explained?

Question

Quizplus · Accepted Answer

Deficits often occur when the economy is in a slump, which is a period when interest rates are typically low to stimulate economic activity. Additionally, the observation that real interest rates have fallen despite higher deficits suggests that deficits themselves do not directly cause high real interest rates. This explanation combines elements of both A and B, making D the correct choice.

Over Short-Run Periods During the Past Three to Four Decades