A rise in the budget deficit

Question

Quizplus · Accepted Answer

When the budget deficit increases, the government is borrowing more money which raises interest rates. As a result, the supply of loanable funds in the market for loanable funds will shift left because individuals and businesses are induced to save more at higher interest rates. This will lead to a decrease in investment and consumption spending. Also, the supply of dollars in the market for foreign-currency exchange will shift left because foreigners are less willing to hold dollar-denominated assets as the higher interest rates make them relatively less attractive. As a consequence, the dollar depreciates in the foreign exchange market.

A Rise in the Budget Deficit