When the government borrows money to fund deficit spending, which of the following is likely to occur?
O Nominal interest rates will fall as national savings increases.
O The central bank must reduce the money supply by an amount equal to the deficit.
O Supply of loanable funds to the private sector falls, and the real interest rate increases.
The deficit tends to encourage additional private investment to match any new government spending.
O The government debt will fall by an amount equal to the new deficit.

Question

22-05-2024
Business

Answered

When the government borrows money to fund deficit spending, which of the following is likely to occur?
O Nominal interest rates will fall as national savings increases.
O The central bank must reduce the money supply by an amount equal to the deficit.
O Supply of loanable funds to the private sector falls, and the real interest rate increases.
The deficit tends to encourage additional private investment to match any new government spending.
O The government debt will fall by an amount equal to the new deficit.

Answer :

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GinnyAnswer GinnyAnswer · Answer 1 · 2024-05-22T12:48:35-04:00

Final answer:

When the government borrows money for deficit spending, it can lead to a reduction in national savings, a rise in real interest rates, and a decrease in the supply of loanable funds available to the private sector.

Explanation:

Crowding Out: When the government borrows money to fund deficit spending, it leads to a situation known as crowding out. This results in a reduction in national savings and a rise in real interest rates. As the government borrows more, it competes with the private sector for funds, causing a decrease in the supply of loanable funds available to the private sector.

Learn more about Government deficit and crowding out here:

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