Final answer:
Increasing financial leverage leads to higher interest payments and can potentially increase a deficit while shifting capital between investments is influenced by their risk and return profiles.
Step-by-step explanation:
As the degree of financial leverage increases, entities incur higher interest payments on borrowed funds, which can lead to growth in their deficits if other expenses remain constant. In the context of an economy, during prosperous times, the increase in leverage amplifies economic growth due to the acceleration of lending. However, when the economy turns sour, lenders become cautious, and the subsequent decrease in available credit can exacerbate an economic downturn.
Moreover, in the realm of investments, higher risk in certain investments or a decline in returns will likely cause investors to shift their financial capital to more attractive alternatives. This process illustrates how the supply of capital can dynamically shift between investments based on their perceived risk and return attributes.