A government budget deficit ________ the demand for loanable funds and ________ investment.

Question

Quizplus · Accepted Answer

A government budget deficit implies that the government is spending more than it is earning, which increases the demand for loanable funds. Increased demand for loanable funds leads to an increase in interest rates, which in turn decreases investment. This is because higher interest rates increase the cost of borrowing, reducing the willingness of firms and households to invest in new projects. Therefore, an increase in budget deficit leads to an increase in the demand for loanable funds and a decrease in investment.

A Government Budget Deficit ________ the Demand for Loanable Funds