If a government increases its budget deficit,then interest rates
A)and domestic investment rise.
B)and domestic investment falls.
C)rise and domestic investment falls.
D)fall and domestic investment rises.

Question

Quizplus · Accepted Answer

When a government increases its budget deficit, it needs to borrow more money to finance its spending. This increases the demand for loanable funds, which puts upward pressure on interest rates. As interest rates rise, borrowing becomes more expensive, reducing the incentive for domestic investment. Therefore, both interest rates and domestic investment fall.

If a Government Increases Its Budget Deficit,then Interest Rates