According to the Classical Theory of Interest (Loanable Funds Framework), if the government increases its budget deficit significantly, what is the most likely impact on the market interest rate, assuming all other factors remain constant?

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Economics · Classical Theory of Interest

Verified Solution4 OptionsUpdated: October 2026👁️1 View

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Interest rates will rise as the aggregate demand for loanable funds increases.

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Answer 1

Interest rates will fall because the government provides more system liquidity.

Answer 2

Interest rates will remain completely stable as the supply of savings is perfectly elastic.

Answer 3

Interest rates will rise as the aggregate demand for loanable funds increases.

Answer 4

Interest rates will fall due to increased government spending injections.

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