If a government chooses to finance a budget deficit by borrowing and the expected inflation rate does not change,this will cause the real interest rate to ________ and the nominal interest rate to ________.

Question

Quizplus · Accepted Answer

When a government borrows to finance a budget deficit, it increases the demand for loanable funds, which typically leads to an increase in the real interest rate. Since the expected inflation rate does not change, the nominal interest rate, which is the sum of the real interest rate and expected inflation, will also increase.

If a Government Chooses to Finance a Budget Deficit by Borrowing