Final answer:
Expansionary fiscal policy that increases the budget deficit can discourage business investment by increasing interest rates, as it leads to crowding out. The correct answer to the question is A) reduce business investment by increasing interest rates.
Step-by-step explanation:
Expansionary fiscal policy that raises the budget deficit may lead to crowding out, which is a situation where increased government borrowing results in higher interest rates. The higher interest rates, in turn, discourage business investment since borrowing costs rise, making investments more expensive. reduce business investment by increasing interest rates.
While expansionary fiscal policy is aimed at boosting the economy by increasing aggregate demand, its interaction with interest rates can have the unintended consequence of dampening private sector investment. Therefore, the correct answer to the question is A) reduce business investment by increasing interest rates.