Graph 13-2 -In Graph 13-2, an increase in the government budget deficit causes the equilibrium interest rate to: A)be unchanged B)increase from r₁ to r₂ in panel (a) C)increase from E₁ to E₂ in panel (c) D)decrease from r₂ to r₁ in panel (a) E)both B and C

Question

Quizplus · Accepted Answer

An increase in government budget deficit can be shown as a shift in the demand curve for loanable funds to the right. This causes an increase in the equilibrium interest rate from r₁ to r₂ in panel (a). The increase in the interest rate also results in a decrease in investment and an increase in saving which are shown in panels (b) and (c) respectively.

Graph 13-2 -In Graph 13-2, an Increase in the Government Budget Deficit