Answer:
The correct option is that a federal government budget deficit will decrease the supply of loanable funds and increase the equilibrium interest rate.
Step-by-step explanation:
A federal government budget deficit refers to situation whereby federal government revenue is lower its expenditures.
When there is a federal government deficit, the federal government usually borrow loanable in order to meet the shortfall in the revenue. The effect of this demand for loanable funds by the federal government is therefore a decrease in the supply of loanable funds.
The decrease in the supply of loanable funds results in an excess demand for loanable funds by the private sector, this in turn leads to an increase the equilibrium interest rate which is the price for loanable fund.
Based on the explanation above, the correct option is therefore that a federal government budget deficit will decrease the supply of loanable funds and increase the equilibrium interest rate.