Question

Other things the same, the effects of an increase in transfer payments on the government's budget deficit will lead to

Answer 1

Question Completion with Options:

A. greater investment.

B. All of the above are correct.

C. higher public saving.

D. a higher interest rate.

Answer:

Other things the same, the effects of an increase in transfer payments on the government's budget deficit will lead to

D. a higher interest rate.

Explanation:

When the government is operating a budget deficit, it means that its spendings are more than its tax revenues.  It then resorts to issuing treasury bills and bonds to finance the deficit.  This naturally reduces the price of bonds and raises interest rates.  With rising interest rates, firms and individuals reduce their spending.  The cost of borrowing becomes more expensive than before.