Suppose that the graph below represents the market for financial capital in Pala

Question

Suppose that the graph below represents the market for financial capital in Palau. How does an increase in the budget deficit of Palau affect its equilibrium interest rate? The equilibrium interest rate increases since the supply curve for financial capital shifts to the left. Interest rate(%) Supply The equilibrium interest rate decreases since the demand curve for financial capital shifts to the left. o The equilibrium interest rate increases since the demand curve for financial capital shifts to the right. The equilibrium interest rate decreases since the supply curve for financial capital shifts to the right. O Demand Quantity of financial capital (% of GDP)

Explanation / Answer

Option (3) is correct.

If budget deficit increases, government finances his deficit by borrowing which increases the demand for financial capital, shifting the demand curve for financial capital rightward. This increases interest rate and quantity of financial capital.

NOTE: Since question does not ask to show any changes to the graph, the increase in demand is not shown in graph.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.