Other things being equal, what is the effect of deficit spending on credit markets?
A) Both the demand for credit and the supply of credit will increase.
B) Both the demand for credit and the supply of credit will decrease.
C) The demand for credit increases while the supply of credit remains constant.
D) The supply of credit will increase while the demand for credit remains the same.

Question

Quizplus · Accepted Answer

Deficit spending typically involves an increase in government borrowing, which puts upward pressure on interest rates. This, in turn, increases the demand for credit while possibly decreasing the supply if lenders become wary of the increased borrowing risk. Therefore, the demand for credit increases while the supply of credit remains constant.

Other Things Being Equal, What Is the Effect of Deficit