Sia
Question
Statistics
Posted 9 months ago
An economy has a budget deficit, and you want to show the impact of the budget deficit on the real interest rate.
What model would you use, and what would be the impact on the interest rate?
Choose 1 answer:
(A) The loanable funds market; real interest rate decreases
(B) The loanable funds market; real interest rate increases
(c) The money market; the real interest rate is not impacted
(D) The AD-AS model; the real interest rate is not impacted
(E) The money market; the real interest rate decreases
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Answer from Sia
Posted 9 months ago
Solution by Steps
step 1
To determine the impact of a budget deficit on the real interest rate, we need to identify the correct model that shows the relationship between government borrowing and the real interest rate
step 2
The loanable funds market is the appropriate model to use in this scenario. It illustrates the market for borrowing and lending for the long term, where the government competes with private borrowers for funds
step 3
When the government has a budget deficit, it needs to borrow more, increasing the demand for loanable funds. According to the loanable funds theory, an increase in demand for loanable funds, with supply remaining constant, leads to an increase in the real interest rate
Answer
B
Key Concept
Loanable Funds Market
Explanation
In the loanable funds market, a budget deficit increases demand for funds, leading to higher real interest rates.
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