When the U.S. government runs a deficit, the resulting higher interest rate:
A) "crowds out" domestic investment.
B) increases net capital outflow.
C) reduces domestic saving.
D) None of these are true.

Question

Quizplus · Accepted Answer

When the government runs a deficit, it increases its borrowing, which in turn increases the demand for loanable funds, leading to higher interest rates. As a result, domestic investment decreases because it becomes more expensive for firms to borrow money. This phenomenon is known as crowding out.