What would an increase in the budget deficit most likely do to investment spending?
A) It would make investment spending fall because the interest rate rises.
B) It would make investment spending rise because the interest rate falls.
C) It would make investment spending fall because the interest rate falls.
D) It would make investment spending rise because the interest rate rises.

Question

Quizplus · Accepted Answer

When there is an increase in the budget deficit, the government has to borrow more money, causing the demand for loanable funds to increase. This increases the interest rate, which decreases investment spending. Therefore, an increase in the budget deficit would make investment spending fall because the interest rate rises.

What Would an Increase in the Budget Deficit Most Likely