Question

An increase in the government budget deficit is most likely to result in an increase in which of the following?

A) Marginal propensity to consume
B) Exports
C) Real interest rate
D) Money supply
E) Simple multiplier

Answer 1

An increase in the government budget deficit is most likely to result in an increase in the real interest rate, due to the government's increased demand for financial capital crowding out private investment.

Step-by-step explanation:

The question is asking about the likely economic effects of an increase in government budget deficit. According to the information provided, when the government increases its borrowing, this can lead to a shift in the demand curve for financial capital to the right. As a result, the equilibrium interest rate rises. Therefore, an increase in the government budget deficit is most likely to result in an increase in the real interest rate, as it shifts from an original lower rate to a higher one due to increased demand for financial capital from the government, which can crowd out private investment.