When budget deficits take place in a high-employment economy, the effect is an increase in capital stock.

Question

Quizplus · Accepted Answer

When budget deficits take place in a high-employment economy, it means that the government is spending more money than it is receiving in revenue. This typically leads to an increase in interest rates, as the government must compete with private borrowers for available funds. Higher interest rates cause a decrease in investment by businesses, and therefore a decrease in capital stock. So, budget deficits in a high-employment economy do not result in an increase in capital stock.

When Budget Deficits Take Place in a High-Employment Economy, the Effect