A reduction in the budget deficit should shift the supply of loanable funds to the right, lower the real interest rate, and increase the quantity demanded of loanable funds.

Question

Quizplus · Accepted Answer

When the budget deficit is reduced, there is less demand for loans from the government, which frees up more funds for private borrowers. This increases the supply of loanable funds, pushing down the real interest rate, and encouraging more investment and consumption, thereby increasing the quantity demanded of loanable funds.

A Reduction in the Budget Deficit Should Shift the Supply