Government budget deficits can lead to higher real interest rates, which will reduce private investment.

Question

Quizplus · Accepted Answer

When the government runs a budget deficit, it may borrow money to finance its spending. This borrowing increases the demand for credit, which can drive up interest rates. Higher interest rates make it more expensive for businesses to borrow money, reducing their ability to invest in new projects and expand operations. As a result, higher government budget deficits can lead to reduced private investment.

Government Budget Deficits Can Lead to Higher Real Interest Rates