I need help answering and explaining this question. If there is an increase in t

Question

I need help answering and explaining this question.

If there is an increase in the government budget deficit a) the supply of loanable funds will decrease, interest rates will increase, and the amount of borrowing will decrease. O b) the supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will increase. O c) the demand for loanable funds will decrease, interest rates will decrease, and the amount of borrowing will decrease. O d) the demand for loanable funds will increase, interest rates will increase, and the amount of borrowing will increase.

Explanation / Answer

The government deficit is the excess of government expenditure over the tax revenue received by the government. So if the government budget deficit increases, it means government needs more money (fund) for financing these deficits. Therefore the demand for loanable fund increases, so the interest rate of the bonds increases due to excess demand of the loanable funds.

So it can be said that with the increase in the government budget deficits, the demand for loanable fund increases and so the interest rate of the bond also increases. So the government borrowing will also increase for financing the budget deficit.

Hence option d is the correct answer.

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