A budget deficit increases the government's demand for loanable funds, resulting in an increase in the interest rate. This is because the government needs to borrow more money to finance the deficit, and the increased demand for borrowing drives up the cost of borrowing, which is the interest rate.

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A Budget Deficit

Question 53

Multiple Choice

A budget deficit:

A) raises the interest rate
B) lowers the interest rate
C) does not affect the interest rate
D) shifts the supply curve for loanable funds to the right

Correct Answer: