What is the effect of a rise in the government budget deficit on real interest rates and investment?

Show Answers

It does not affect the real interest rate and does not reduce investment.It lowers the real interest rate and reduces investment.None of the above choices are correct.It raises the real interest rate and decreases investment.

Explanation

An increase in the government budget deficit typically leads to higher real interest rates, which in turn discourages private investment by making borrowing more expensive. This phenomenon is known as 'crowding out.' Therefore, option D correctly describes this relationship.