Holding everything else constant, when the government uses an expansionary policy in the presence of a deficit, it will result in:

Question

Quizplus · Accepted Answer

When the government uses an expansionary policy (such as increasing government spending or cutting taxes) in the presence of a deficit, it will increase the demand for loanable funds. Since the supply of loanable funds remains the same, the equilibrium interest rate will rise. This is because borrowers (including the government) are now willing to pay higher interest rates to obtain the necessary funds.

Holding Everything Else Constant, When the Government Uses an Expansionary