Answer to Question #195725 in Microeconomics for Narendra

Question

Carefully discuss how an increase in the budget deficit may impact the private savings, private investment, and trade deficit. Carefully explain the process through which a larger budget will affect these macroeconomic variables.

Answer 1

The influence of fiscal deficits on private investment is a subject that has yet to be resolved. If budget deficits are to be funded through borrowing, interest rates must rise in order for capital markets to rebalance. The crowding-out effect is caused by high interest rates, which reduce investment.