What happens if there is an increase in the budget deficit?
a) Raise the real interest rate and decline the quantity of loanable funds demanded for
investment
b) Lower the real interest rate and increase the quantity of loanable funds demanded
for investment.
c) Raise the real interest rate and increase the quantity of loanable funds demanded
for investment.
d) Lower the real interest rate and decrease the quantity of loanable funds demanded
for investment.
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Structural deficits are permanent, and occur when there is an underlying imbalance between revenues and expenses. ... When an increase in government expenditure or a decrease in government revenue increases the budget deficit, the Treasury must issue more bonds. This reduces the price of bonds, raising the interest rate.
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