If a budget deficit increases interest rates, it is possible that investment will
A)fall, leading to a larger capital stock.
B)fall, so that there is a smaller capital stock.
C)rise, because investment is directly related to interest rates.
D)rise, because investment is more attractive when interest rates are higher.

Question

Quizplus · Accepted Answer

When interest rates increase due to a budget deficit, it becomes more expensive for businesses to borrow money for investment. As a result, investment may decrease, leading to a smaller capital stock.

If a Budget Deficit Increases Interest Rates, It Is Possible