Question

When raising funds, deficit spending units generally prefer:

A) Higher interest rates
B) Lower interest rates
C) Long-term investments
D) Short-term investments

Answer 1

B) Lower interest rates

Deficit spending units typically favor lower interest rates to reduce borrowing costs, but large deficits can raise interest rates, deterring investment.

Step-by-step explanation:

When raising funds, deficit spending units generally prefer lower interest rates. This preference is driven by the desire to minimize borrowing costs over the life of a loan. Economic studies suggest that increases in the budget deficit can lead to higher interest rates, which can discourage firms from making physical capital investments. The crowding out of private investment occurs due to higher interest rates. However, if deficits increase substantially, the risk of rising interest rates becomes a more significant concern.