Question

Which of the following statements accurately describe the effect of the increase in government borrowing? Check all that apply.

a) Interest rates may rise.
b) Aggregate demand increases.
c) Private investment may decrease.
d) Inflation is likely to decrease.

Answer 1

Increasing government borrowing can lead to higher interest rates, decreased private investment, increased aggregate demand, and a decrease in inflation.

Step-by-step explanation:

Increasing government borrowing can have several effects:

1. Interest rates may rise: When the government borrows money, it increases the demand for loanable funds. This increased demand can lead to higher interest rates as lenders charge higher rates to lend money to the government.
2. Private investment may decrease: Higher interest rates can discourage private investment because businesses and individuals may find it more expensive to borrow money for investment purposes.
3. Aggregate demand increases: Government borrowing injects money into the economy, which can stimulate consumer spending and increase aggregate demand.
4. Inflation is likely to decrease: If the government resorts to inflationary tactics to reduce the real value of its debt, it can lead to a decrease in the purchasing power of money and a decrease in inflation.