When there is a budget deficit, the government needs to borrow money. This increases the demand for loanable funds, which raises interest rates. Higher interest rates make borrowing more expensive, which reduces investment. Therefore, a budget deficit raises the interest rate and reduces investment.

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A Budget Deficit

Question 209

Multiple Choice

A budget deficit

A) raises the interest rate and investment.
B) reduces the interest rate and investment.
C) raises the interest rate and reduces investment.
D) reduces the interest rate and raises investment.

Correct Answer: