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-(Figure: Loanable Funds Market III)Use Figure: Loanable Funds Market III.If the government in a closed economy is running a budget balance of zero when it decides to increase defence spending by $200 billion and then finances the spending by selling bonds,the equilibrium interest rate will:

Question

Use the following to answer questions: 
-(Figure: Loanable Funds Market III)Use Figure: Loanable Funds Market III.If the government in a closed economy is running a budget balance of zero when it decides to increase defence spending by $200 billion and then finances the spending by selling bonds,the equilibrium interest rate will:

Quizplus · Accepted Answer

When the government increases spending and finances it by selling bonds, it increases the demand for loanable funds, leading to a rise in the equilibrium interest rate.

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