Question

Which statement is a major consequence of high government budget deficits? O All else held constant, high budget deficits financed by borrowing will lead to lower interest rates. Budget deficits cause unemployment as firms relocate to countries with balanced budgets. If the government finances the deficit by borrowing money, it can crowd out business investment Printing money to finance the deficit can lead to a significantly deflationary environment.

Answer 1

Answer:

If the government has a budget deficit, crowding out might occur. Crowding out leads to all of the following; a higher real interest rate, a smaller capital stock in the future and a decreased quantity of investment.  Borrowing from the rest of the world  Government budget surpluses, private saving.

Answer 2

A major consequence of the government having a high budget deficit is that  If the government finances the deficit by borrowing money, it can crowd out business investment.

The government is a high net borrower which means that when it borrows, it borrows in high amounts. If the government has a high deficit, it will have to borrow a high amount in order to finance this deficit.

When this happens, the amount of money that can be borrowed in an economy reduces which would lead to high interest rates because as per the law of supply, lower supply leads to higher prices.

These high interest rates would make it difficult for businesses to be able to borrow money because they would be unable to pay back which is why high government borrowing crowds out business investment.

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