Final answer:
The statement is false; financial leverage is influenced not only by the amount borrowed but also by the interest rate on debt. As a government borrows more, interest rates can rise, increasing the cost of debt and impacting financial leverage.
Step-by-step explanation:
The statement "The degree of financial leverage is not influenced by the interest rate on debt, only the amount borrowed" is false. Financial leverage refers to the use of borrowed capital (debt) to finance the purchase of assets with the expectation that the income or capital gain to be generated from those assets will be greater than the cost of borrowing. Factors that affect financial leverage include both the amount of debt and the interest rate on that debt. As interest rates increase, the cost of debt also increases, which can affect the degree to which an organization is leveraged.
For instance, when a government increases borrowing, it can shift the demand curve for financial capital, leading to higher interest rates, as shown in various examples where equilibrium interest rates rise when there is an increase in borrowing. This increased cost of borrowing impacts not only the deficit through higher interest payments but also affects the degree of financial leverage.