An increase in the government budget deficit ?
Correct answer: D. Increases the real interest rate and crowds out investment
- A. has no impact on the real interest rate and fails to crowed out investment
- B. decreases the real interest rate and crowds out investment
- C. None of these answers
- D. Increases the real interest rate and crowds out investment
Explanation
A larger government deficit reduces national saving, shifting the supply of loanable funds leftward. The real interest rate rises, which discourages private investment through crowding out.
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