Question

The Congressional Budget Office reported that federal budget deficits in the United States were likely to increase in future years, and these higher deficits might ""pose a threat to the economy by crowding out business investment and threatening a spike in interest rates."" This higher budget deficit would be represented graphically by

A) a shift in the supply curve for loanable funds to the right.
B) a shift in the supply curve for loanable funds to the left.
C) a movement to the right along the supply curve for loanable funds.
D) a movement to the left along the supply curve for loanable funds.

Answer 1

A higher budget deficit would be represented graphically by a movement to the right along the supply curve for loanable funds.

Step-by-step explanation:

The higher budget deficit would be represented graphically by a movement to the right along the supply curve for loanable funds (Option C). An increase in government borrowing increases the demand for financial capital, which shifts the demand curve to the right. As a result, the equilibrium interest rate increases, leading to higher interest rates.