Assume the government were to decide to increase the budget deficit.This action will most likely cause __________ to increase

Question

Quizplus · Accepted Answer

When the government increases the budget deficit, it will need to borrow more money, resulting in an increase in government borrowing. This, in turn, reduces the supply of loanable funds, causing interest rates to go up. Additionally, if the increased deficit spending leads to inflation, the central bank may increase interest rates to combat the inflation, further increasing interest rates. The increase in interest rates and government borrowing can also potentially lead to higher unemployment due to reduced private sector investment and consumption. Hence, both options A and B are correct.

Assume the Government Were to Decide to Increase the Budget