CFA Practice Question

There are 341 practice questions for this study session.

CFA Practice Question

Which of the following are reasons why budget deficits may lead to an increase in the nominal interest rate?

I. Increased demand for loanable funds
II. Rational expectation of future tax increases or spending cuts
III. Inflation
A. I and II
B. II and III
C. I and III
Explanation: Since the government must finance the budget deficit with debt, this increases the demand for loanable funds, and hence increases real interest rates. Deficit spending also causes inflation, since the shift in aggregate demand results in a higher equilibrium price level. This would also increase nominal interest rates.

User Contributed Comments 1

User Comment
gill15 II is correct i`m assuming but it doesnt increase nominal interest rates.
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