QuestionJuly 2, 2025

An increase in the government's budget surplus will cause the interest rate to: A either increase or decrease. B remain the same. C increase D decrease

An increase in the government's budget surplus will cause the interest rate to: A either increase or decrease. B remain the same. C increase D decrease
An increase in the government's budget surplus will cause the interest rate to:
A either increase or decrease.
B remain the same.
C increase
D decrease

Solution
4.5(263 votes)

Answer

D decrease Explanation 1. Understand the relationship between budget surplus and interest rates An increase in the government's budget surplus means the government is spending less than it earns, leading to a decrease in demand for borrowed funds. 2. Apply the supply and demand model for loanable funds With a higher budget surplus, the supply of loanable funds increases, shifting the supply curve to the right. 3. Determine the effect on interest rates The increased supply of loanable funds typically leads to a decrease in the equilibrium interest rate.

Explanation

1. Understand the relationship between budget surplus and interest rates<br /> An increase in the government's budget surplus means the government is spending less than it earns, leading to a decrease in demand for borrowed funds.<br />2. Apply the supply and demand model for loanable funds<br /> With a higher budget surplus, the supply of loanable funds increases, shifting the supply curve to the right.<br />3. Determine the effect on interest rates<br /> The increased supply of loanable funds typically leads to a decrease in the equilibrium interest rate.
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