Final answer:
An increase in the government budget deficit increases the government’s demand for funds and the interest rate in the economy, shifting the demand curve for funds to the right.
Step-by-step explanation:
Everything else equal, an increase in the government budget deficit would:
- Increase the government's demand for funds (I)
- Shift the demand curve for funds to the right, not the left (II is incorrect)
- Increase the interest rate in the economy (III)
As the government demands more funds to cover its deficit, this increased demand shifts the demand curve for financial capital to the right. Consequently, the increased competition for funds drives up the interest rate. According to the provided figures and examples in different scenarios, the graphical analysis illustrates how the intersection point of the demand and supply curves moves to a higher interest rate as the demand increases due to government borrowing. Therefore, the correct answer is C. I and III only.