When the government runs deficit, it causes the cost of borrowing to:
A) increase, which decreases private demand for loanable funds.
B) decrease, which decreases private demand for loanable funds.
C) increase, which increases private demand for loanable funds.
D) decrease, which increases private demand for loanable funds.

Question

Quizplus · Accepted Answer

When the government runs a deficit, it increases the demand for loanable funds, which in turn causes the interest rates to rise. This increase in interest rates results in a decrease in private demand for loanable funds because borrowing becomes more expensive. Therefore, choice A is the best answer.

When the Government Runs Deficit, It Causes the Cost of Borrowing