Question

In comparison to a government that runs a balanced budget, when the government runs a budget deficit,

A) the equilibrium interest rate will fall.
B) household savings will fall.
C) business investment will fall.
D) none of the above

Answer 1

When the government runs a budget deficit, the effects on the equilibrium interest rate, household savings, and business investment are not straightforward and depend on various factors.

Step-by-step explanation:

The correct answer is D) none of the above.

When the government runs a budget deficit, it means that it is spending more money than it is collecting in revenue. This leads to an increase in government borrowing, which can potentially crowd out private investment and increase interest rates. However, the specific effects on the equilibrium interest rate, household savings, and business investment will depend on various other factors such as the state of the economy, monetary policy, and individual behavior.