Other things being equal, what is the effect of government deficit increases on interest rates?
A) Interest rates decline.
B) Interest rates rise.
C) Interest rates hold constant because the demand for credit decreases.
D) There is no impact unless the Federal Reserve decides to alter the money supply.

Question

Quizplus · Accepted Answer

When the government deficit increases, it means that the government is borrowing more money to finance its spending, which results in an increase in the demand for credit. As a result, lenders will increase the interest rates in order to offset the increased risk of lending money to the government. Therefore, interest rates will rise.

Other Things Being Equal, What Is the Effect of Government