An increase in the budget deficit makes domestic interest rates
A)rise because the supply of loanable funds shifts left.
B)fall because the supply of loanable funds shifts left.
C)rise because the demand for loanable funds shifts right.
D)fall because the demand for loanable funds shifts right.

Question

Quizplus · Accepted Answer

An increase in the budget deficit means the government is borrowing more money from the loanable funds market, which increases the demand for loanable funds. With a fixed supply of loanable funds, this raises the equilibrium interest rate. Therefore, domestic interest rates rise because the supply of loanable funds shifts left.

An Increase in the Budget Deficit Makes Domestic Interest Rates