If other factors are held constant, what happens when the federal government finances a growing budget deficit by increasing the amount it borrows from the private sector?
A)There will be an increase in the interest rate.
B)There will be a decrease in the interest rate.
C)The crowding out effect will be cancelled out.
D)There will be an increase in net exports.

Question

Quizplus · Accepted Answer

When the federal government finances a growing budget deficit by increasing the amount it borrows from the private sector, it places upward pressure on interest rates because it increases the demand for credit. As a result, lenders will respond by raising the interest rate they charge for loans to the government, and this increase in interest rates will discourage private investment, thus crowding out other borrowers who would have borrowed at lower interest rates.

If Other Factors Are Held Constant, What Happens When the Federal