When the U.S. government runs a deficit, the savings in the market for loanable funds shifts:
A) left, increasing interest rates and decreasing domestic investment and NCO.
B) left, decreasing interest rates and increasing domestic investment and NCO.
C) right, decreasing interest rates and increasing domestic investment and NCO.
D) right, increasing interest rates, and increasing domestic investment and NCO.

Question

Quizplus · Accepted Answer

When the U.S. government runs a deficit, it needs to borrow more money from the market for loanable funds. This results in an increase in demand for loanable funds, shifting the savings supply curve to the left. This causes an increase in the equilibrium interest rate and a decrease in domestic investment and net capital outflow (NCO) as borrowing becomes more expensive.