A government reduces its budget deficit,but at the same time people become concerned that the outlook for future government expenditures and revenues increase the chance it will default.Which of the following is correct?
A)The reduced budget deficit will raise interest rates in general.The increased risk of default will raise interest rates on government bonds.
B)The reduced budget deficit will raise interest rates in general.The increased risk of default will reduce interest rates on government bonds.
C)The reduced budget deficit will reduce interest rates in general.The increased risk of default will raise interest rates on government bonds.
D)The reduced budget deficit will reduce interest rates in general.The increased risk of default will reduce interest rates on government bonds.

Question

Quizplus · Accepted Answer

When a government reduces its budget deficit, it generally leads to a decrease in interest rates. However, the increased risk of default due to concerns about future government expenditures and revenues will offset this effect and raise interest rates on government bonds. Therefore, choice C is the correct answer.

A Government Reduces Its Budget Deficit,but at the Same Time