An increase in a budget deficit financed by borrowing can increase interest rates and reduce investment spending thereby creating lower rates of economic growth.

Question

Quizplus · Accepted Answer

When a government increases its borrowing to finance a budget deficit, it may lead to a higher demand for credit in the market, which can increase interest rates. Higher interest rates, in turn, can discourage investment spending by firms and individuals, leading to lower rates of economic growth.

An Increase in a Budget Deficit Financed by Borrowing Can