An increased government budget deficit causes the ____ loanable funds to shift to the _____.

Question

BlackTom AI · Accepted Answer

Government budget deficits increase government borrowing, which raises the demand for loanable funds and shifts the demand curve to the right.

1) Relevant knowledge points and concepts
- Loanable funds market: supply = national saving; demand = borrowers (investment by firms + government borrowing if there is a deficit). The equilibrium interest rate balances saving and borrowing.
- A budget deficit means the government needs to borrow more, adding to demand for loanable funds.
- A rightward shift in demand raises the equilibrium real interest rate; this can crowd out some private investment.

2) Step-by-step reasoning
- Initially: Demand D(r) and Supply S(r) determine equilibrium (r0, Q0).
- A larger government deficit increases government borrowing. Government borrowing is part of the demand side in this market, so the demand curve D(r) increases at every interest rate → D shifts right to D'.
- New equilibrium is found where S(r) intersects D'(r). Because demand is higher at each r, the intersection occurs at a higher r and a larger amount of funds borrowed overall.

3) Example calculation (intermediate steps)
- Suppose D(r) = 200 − 10r and S(r) = 50 + 10r. Solve initial equilibrium:
  200 − 10r = 50 + 10r → 150 = 20r → r0 = 7.5.
  Q0 = 200 − 10(7.5) = 125.
- Increase demand by 20 (government borrows more): D'(r) = 220 − 10r.
  220 − 10r = 50 + 10r → 170 = 20r → r1 = 8.5.
  Q1 = 220 − 10(8.5) = 135.
- Result: demand shifted right, interest rate rose, quantity of loanable funds exchanged increased.

4) Why the correct answer is correct
- Because the government’s additional borrowing directly increases demand for funds; supply (savings) is not directly increased by a deficit. Therefore the demand curve shifts to the right.

5) Why other options are incorrect
- b (demand; left): a deficit does not reduce demand; it increases it.
- c and d (supply of; left/right): the deficit changes borrowing (demand), not the supply of savings. Supply shifts would be caused by changes in saving behavior or income, not by a government deficit.

6) Conclusion
- The correct choice is a. demand for; right, which matches the provided answer.

An increased government budget deficit causes the loanable funds to shift to the _.Single choice

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An increased government budget deficit causes the ____ loanable funds to shift to the _____.Single choice