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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

Sketch a diagram of how sustained budget deficits cause low economic growth.

To determine

To state: The reason of sustained budget deficits causing low economic growth with the help of diagram.

Explanation

Interest rate is the rate which is borne by the borrower for the loan taken. In the financial market, the equilibrium will appear on the intersection of demand and supply of financial capital. In order to sustain the budget deficit, it is needed to crowd out the private investment by increasing the interest rates.

On the other hand, to sustain the budget deficit, government borrows more of financial capital. This leads to rise in the demand of financial capital. Diagrammatically, it can be shown as done below:

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