An increase in the budget deficit that causes the government to increase its borrowing

Question

a. shifts the supply of loanable funds to the left.
b. shifts the demand for loanable funds to the right.
c. shifts the demand for loanable funds to the left.
d. shifts the supply of loanable funds to the right.

Answer 1

An increase in the budget deficit typically means that the government is spending more than it is taking in through revenue, which requires it to borrow more money. This increased borrowing by the government leads to a higher demand for loanable funds, as the government competes with other borrowers for available funds.

Therefore, the correct answer is:

b. shifts the demand for loanable funds to the right.