An increase in the budget deficit will
A) raise the real interest rate and decrease the quantity of loanable funds demanded for investment.
B) lower the real interest rate and increase the quantity of loanable funds demanded for investment.
C) raise the real interest rate and increase the quantity of loanable funds demanded for investment.
D) lower the real interest rate and decrease the quantity of loanable funds demanded for investment.

Question

Quizplus · Accepted Answer

An increase in the budget deficit typically leads to higher government borrowing, which raises the demand for loanable funds. This increased demand can push up the real interest rate, leading to a decrease in the quantity of loanable funds demanded for private investment.

An Increase in the Budget Deficit Will