Figure 16.3
-Refer to Figure 16.3.Beginning at equilibrium,if the government budget deficit rises,which of the following would you expect to see?

Question

Figure 16.3 
-Refer to Figure 16.3.Beginning at equilibrium,if the government budget deficit rises,which of the following would you expect to see?

Quizplus · Accepted Answer

An increase in government budget deficit would cause an increase in demand for loanable funds by the government, which would shift the demand curve to the right. As a result, the equilibrium interest rate would rise from 4% to a higher level. This higher interest rate would discourage firms from borrowing, as the cost of borrowing would be higher. Therefore, the quantity of loanable funds demanded by firms would fall below $120 million.

Figure 16.3 -Refer to Figure 16.3.Beginning at Equilibrium,if the Government Budget Deficit