The effect of a government budget deficit
{"Image DocumentName": "The effect of a government budget deficit", "Image ImageDescription": "4. The effect of a government budget deficit. Interest. Rate. S2. Supply, S1. Demand. 6% 1. A budget deficit decreases the supply of loanable funds which. raises the. equilibrium. interest rate  800. 5%  1,200. Loanable Funds. (in billions of dollars) and reduces the equilibrium quantity of loanable funds. When the government spends more than it receives in tax revenue, the resulting budget deficit lowers national saving. The supply of loanable funds decreases, and the equilibrium interest rate rises. Thus, when the government borrows to finance its budget deficit, it crowds out households and firms that otherwise would borrow to finance investment. Here, when the supply shifts from S1 to S2, the equilibrium interest rate rises from 5 percent to 6 percent, and the equilibrium quantity of loanable funds saved and invested falls from  1,200 billion to  800 billion.", "Image XResolution": "37", "Image YResolution": "37", "Image ResolutionUnit": "Pixels/Centimeter", "Image Software": "SlidePlayer", "Image YCbCrPositioning": "Centered"}