In an open economy, an increase in the government's budget deficit will ________ the domestic real interest rate and ________ the level of capital investment in the country, holding other factors constant.
A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase

Question

Quizplus · Accepted Answer

When the government's budget deficit increases, fewer loanable funds are available to other borrowers and domestic real interest rates rise, causing private capital investment to fall.

In an Open Economy, an Increase in the Government's Budget