When the government budget deficit rises, national saving is reduced, interest rates rise, and investment falls.

Question

Quizplus · Accepted Answer

When the government budget deficit rises, it means the government is spending more than it is earning, which reduces the overall pool of savings available in the economy. This reduction in national saving leads to higher interest rates because there is less money available for lending. As interest rates rise, borrowing costs increase, which typically leads to a decrease in investment since businesses and individuals are less inclined to borrow money for investment purposes when it is more expensive to do so.

When the Government Budget Deficit Rises, National Saving Is Reduced