A larger budget deficit
A)raises the interest rate and investment.
B)reduces the interest rate and investment.
C)raises the interest rate and reduces investment.
D)reduces the interest rate and raises investment.

Question

Quizplus · Accepted Answer

A larger budget deficit typically leads to higher interest rates because the government needs to borrow more from the private sector, which in turn reduces the amount of funds available for private investment. This scenario increases the cost of borrowing (interest rates) and consequently reduces investment.

A Larger Budget Deficit