An increase in the budget deficit
A)reduces investment because the interest rate rises.
B)reduces investment because the interest rate falls.
C)raises investment because the interest rate rises.
D)raises investment because the interest rate falls.

Question

Quizplus · Accepted Answer

An increase in the budget deficit leads to an increase in government borrowing, which increases the demand for credit in financial markets. As the demand for credit increases, the interest rate rises, as lenders charge higher interest rates to supply more credit. This increase in interest rates makes investing more expensive, reducing investment.

An Increase in the Budget Deficit