Question

If the budget deficit increases then a. saving and the interest rate rise. b. saving rises and the interest rate falls. c. saving falls and the interest rate rises. d. saving and the interest rate fall.

Answer 1

Answer:

c. saving falls and the interest rate rises.

Explanation:

If Country A runs a budget deficit, it forces the government to issue bonds at reduced prices in order to raise funds to shore up the decreased government revenue.  When bonds are issued, the government is mopping up the savings, thus reducing the available savings.  With this increased budget deficit, interest rates will rise as the cost of funding increases to match the inflationary effect of the deficit.  And the vicious circle starts.