<p>Why does a bigger government deficit increase interest rate? I thought the more a government spends, the more money there is in the economy so interest rates would go down. But, my review book says the increase deficit increases interest rates. PLEASE EXPLAIN!!!</p>
<p>There are two theories concerning Deficit Spending and the Loanable Funds Market. One states that it will shift supply to the left, as the government “calls first dibs” on loanable funds, essentially removing them from the market. The other states that the government is a regular part of the market, so if it spends more it will shift demand to the right. Though they disagree over the quantity change, both theories confirm that if the government engages in Deficit Spending, the Supply/Demand shift will increase the Interest Rate.</p>
<p>thanks alotte</p>