Final answer:
Government borrowing to finance budget deficits may crowd out private investment due to increasing interest rates, which makes borrowing more expensive. This action can also influence savings and aggregate demand in the economy, but does not directly increase planned aggregate spending or the multiplier effect of government purchases.
Step-by-step explanation:
When the government borrows funds in financial markets to pay for budget deficits, one notable effect is that private investment spending may be crowded out. This occurs because as the government borrows more, it competes with the private sector for financial resources, leading to potentially higher interest rates. Higher interest rates, in turn, can make borrowing more expensive for private investors, and some may therefore reduce their investment spending. Additionally, rising interest rates can also lead to decreased savings as the higher cost of borrowing disincentivizes consumption and encourages savings. Overall, government borrowing can have a complex impact on the economy, influencing private saving, investment, interest rates, and aggregate demand.
In contrast, the notion that planned aggregate spending decreases or that the multiplier effect of government purchases increases isn't typically associated with government borrowing to finance deficits. Moreover, the relationship between interest rates and consumption is nuanced. While higher interest rates might reduce consumption by increasing the cost of borrowing, they may also increase savings as people receive more return on their savings. However, the net effect depends on a variety of factors including consumer confidence, inflation expectations, and fiscal policy measures.