If a government increases its budget deficit, which statement would best describe the consequences?
A) Interest rates and domestic investment rise.
B) Interest rates and domestic investment fall.
C) Interest rates rise, and domestic investment falls.
D) Interest rates fall, and domestic investment rises.

Question

Quizplus · Accepted Answer

When the government increases its budget deficit, it typically borrows more money by issuing bonds. This increases the demand for credit, causing interest rates to rise. As a result, domestic investment falls because it becomes more expensive for businesses to borrow money to invest in their operations. Therefore, the correct statement would be "Interest rates rise, and domestic investment falls."

If a Government Increases Its Budget Deficit, Which Statement Would