What is the effect of a larger budget deficit on the real interest rate and the demand for loanable funds used for investment?

Show Answers

It increases the real interest rate and reduces the amount of loanable funds sought for investmentIt decreases the real interest rate and raises the demand for loanable funds for investmentIt causes the real interest rate to rise and boosts the demand for loanable funds for investmentIt lowers the real interest rate and diminishes the demand for loanable funds for investment

Explanation

An increase in the budget deficit tends to push up the real interest rate because the government competes for available loanable funds. This higher interest rate discourages some investment, leading to a decrease in the quantity of loanable funds demanded for investment.