Suppose a country has a larger increase in debt in 2014 than it had in 2013.Then other things the same,
A)the supply of loanable funds shifts rightward and the interest rate falls.
B)the supply of loanable funds shifts leftward and the interest rate rises.
C)the demand for loanable funds shifts leftward and the interest rate falls.
D)the demand for loanable funds shifts rightward and the interest rate rises.

Question

Quizplus · Accepted Answer

An increase in public debt indicates that the government needs to borrow more funds to finance its expenditures. This will increase the demand for loanable funds, which in turn will shift the demand curve rightward. The increased demand for loanable funds will push up the interest rate, and hence the correct answer is B, where the supply of loanable funds shifts leftward, leading to a rise in the interest rate.

Suppose a Country Has a Larger Increase in Debt in 2014