Refer to Figure 5.1 for the following questions.
Figure 5.1

-Refer to Figure 5.1. Beginning at equilibrium, if the government budget deficit rises, which of the following would you expect to see?

Question

Refer to Figure 5.1 for the following questions.
Figure 5.1
 
-Refer to Figure 5.1. Beginning at equilibrium, if the government budget deficit rises, which of the following would you expect to see?

Quizplus · Accepted Answer

An increase in the government budget deficit reduces national saving, which decreases the supply of loanable funds, driving up the interest rate. This in turn reduces the quantity of loanable funds demanded by firms, causing a movement up the demand curve from D1 to D2. Since the interest rate has risen, the quantity of loanable funds demanded by firms will fall below $120 million, as shown by the intersection of the new demand curve (D2) with the original supply curve (S) at point A'.

Refer to Figure 5.1 for the Following Questions