If a government increases its budget deficit, which of the following best describes the consequences?
A)Interest rates and domestic investment rise.
B)Interest rates and domestic investment fall.
C)Interest rates rise and domestic investment fall.
D)Interest rates fall and domestic investment rise.

Question

Quizplus · Accepted Answer

When a government increases its budget deficit, it creates more demand for funds from the domestic market, causing interest rates to rise. This rise in interest rates eventually leads to a fall in domestic investment, as borrowing costs increase. Hence, the correct option is C.

If a Government Increases Its Budget Deficit, Which of the Following