The U.S.government increases its budget deficit,but at the same time Congress eliminates an investment tax credit.Which of the following is correct?
A)The interest rate will increase;investment may increase or decrease.
B)The interest rate will decrease;investment may increase or decrease.
C)The interest rate may increase or decrease;investment will decrease.
D)The interest rate may increase or decrease;investment will increase.

Question

Quizplus · Accepted Answer

Increasing the budget deficit leads to an increase in the supply of government bonds, which can lower the demand for investment in the private sector. Eliminating the investment tax credit further decreases the incentive to invest. This decrease in investment demand can lead to a decrease in the interest rate, but also a decrease in investment. However, the exact impact on the interest rate is ambiguous and will depend on other factors such as the overall state of the economy and monetary policy.

The USGovernment Increases Its Budget Deficit,but at the Same Time Congress