If the budget deficit increases then
A) saving and the interest rate rise
B) saving rises and the interest rate falls
C) saving falls and the interest rate rises
D) saving and the interest rate falls

Question

Quizplus · Accepted Answer

When the budget deficit increases, the government has to borrow more money through bonds to finance its spending, which increases the demand for loanable funds in the economy. This increase in demand for loanable funds puts upward pressure on interest rates, making it more expensive for individuals and businesses to borrow. As a result, people save less, reducing the supply of loanable funds and further driving up interest rates. Therefore, option C is the correct answer.

If the Budget Deficit Increases Then