One mechanism through which increasing public debt may impact the economy is that the resulting
A) increased competition for funds increases interest rates and causes a reduction in investment.
B) increased competition for funds decreases interest rates and causes an increase in investment.
C) decreased competition for funds decreases interest rates and causes a reduction in investment.
D) decreased competition for funds decreases interest rates and causes an increase in investment.

Question

Quizplus · Accepted Answer

When the government increases its borrowing or public debt, it competes with private investors for funds, leading to higher interest rates. This, in turn, discourages private investment and causes a reduction in investment overall. Therefore, choice A is the best answer.

One Mechanism Through Which Increasing Public Debt May Impact the Economy