Question : Government borrowing to finance budget deficits ____________.
Option 1: will exert downward pressure on interest rates
Option 2: will not affect interest rates
Option 3: will increase the supply of loanable funds
Option 4: will put upward pressure on interest rates
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Correct Answer: will put upward pressure on interest rates
Solution : The correct answer is will put upward pressure on interest rates .
When a government's expenditure on goods, services, or transfer payments exceeds its tax collections, it has a budget deficit. Governments borrow money to cover budgetary shortfalls, and each time they do so, the national debt grows. Increased debt levels, depreciation of the currency, and inflation are all possible effects of a large budget imbalance. The result is an increase in the central bank's benchmark interest rates.
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