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How does a government budget deficit influence the loanable funds market, and why does a decrease...

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How does a government budget deficit influence the loanable funds market, and why does a decrease in the deficit lower the real interest rate?

Government Budget Deficit:

A budget deficit takes place once there are more expenses than revenue. Hence, the budget deficit accurately displays the country's financial health. For instance, if a government of a particular country gets revenue of about 10 billion dollars annually and spends 12 billion dollars on the same year, it then implies that the country's budget deficit is 2 billion dollars since expenditure exceeds revenue.

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Deficit causes the demand for loanable funds to rise. Hence, the surpluses reduce loanable demands. This occurrence is because the moment a government...

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What is a Budget Deficit? - Definition, Causes & History

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Chapter 11 / Lesson 14
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Examine the budget deficit definition and the causes of budget deficits. Find out how government budget deficits affect the economy and learn relevant history.


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