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

Question

BlackTom AI · Accepted Answer

A government budget deficit means the government must borrow more, so the demand for loanable funds increases and shifts right.

Relevant concepts:
- Loanable funds market: supply = national saving (private + public saving) and demand = investment plus government borrowing when there is a deficit.
- A budget deficit (G > T) increases government borrowing, raising total demand for funds.
- Shifts in demand or supply change the equilibrium real interest rate and quantity of loanable funds; higher demand → higher interest rate and larger quantity demanded/supplied at the new equilibrium.

Step-by-step reasoning:
1. Represent demand for loanable funds as D = I + (G − T). If the budget deficit rises, (G − T) increases.
2. An increase in (G − T) directly raises D at every interest rate, so the demand curve shifts to the right by the amount of additional government borrowing.
3. With supply (saving) held fixed in the short run, the rightward shift of demand leads to a higher equilibrium real interest rate and a larger equilibrium quantity of loanable funds.
4. The higher interest rate tends to "crowd out" some private investment (I falls relative to what it would have been), but total funds borrowed rise because government borrowing has increased.

Why the correct answer is correct:
- The deficit increases government borrowing (part of demand), so it is the demand curve that shifts, and it shifts right (an increase), matching "demand for; right."

Why the other options are incorrect:
- a (demand; left): a deficit increases, not decreases, demand—so left is wrong.
- b (supply; left): a budget deficit does not directly shift the supply of loanable funds left in the standard model; supply is driven by saving.
- c (supply; right): a deficit does not increase saving/supply; it increases borrowing/demand.

Conclusion: The correct choice is d. demand for; right, which matches the provided answer.

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An increased government budget deficit causes the ____ loanable funds to shift to the _____.单项选择题