Graph 32-1

-In Graph 32-1, an increase in the government budget deficit causes the equilibrium interest rate to:

Question

Graph 32-1
 
-In Graph 32-1, an increase in the government budget deficit causes the equilibrium interest rate to:

Quizplus · Accepted Answer

Panel (a) shows the market for loanable funds, where an increase in the government budget deficit causes an increase in the demand for loanable funds, shifting the demand curve to the right. This leads to an increase in the equilibrium interest rate from r₁ to r₂. Panel (c) shows the effect of the higher interest rate on investment, which decreases from E₁ to E₂ as a result. Therefore, choice B is the correct answer.

Graph 32-1 -In Graph 32-1, an Increase in the Government Budget Deficit