If the Canadian government went from a budget deficit to a budget surplus, what would we expect to happen to interest rates and investment?

Question

Quizplus · Accepted Answer

If the government went from a budget deficit to a budget surplus, it would reduce the amount of new debt that the government is issuing, and therefore reduce the supply of government securities in the market. This reduction in supply would lead to a decrease in the interest rates. With decreased interest rates, the cost of borrowing money would become cheaper, which leads to an increase in investment. Therefore, with a budget surplus, we can expect a decrease in interest rates and an increase in investment.

If the Canadian Government Went from a Budget Deficit to a Budget