Interest rate (%)SupplyDemandQuantity of financial capital (% of GDP)Suppose that the graph above represents the market for financial capital in Yemen. How does an increase in the budgetdeficit of Yemen affect its equilibrium interest rate?O A. The equilibrium interest rate decreases since the demand curve for financial capital shifts to the left.O B. The equilibrium interest rate increases since the demand curve for financial capital shifts to the right.O C. The equilibrium interest rate increases since the supply curve for financial capital shifts to the left.O D. The equilibrium interest rate decreases since the supply curve for financial capital shifts to the right.

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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Interest rate (%)
Supply
Demand
Quantity of financial capital (% of GDP)
Suppose that the graph above represents the market for financial capital in Yemen. How does an increase in the budget
deficit of Yemen affect its equilibrium interest rate?
O A. The equilibrium interest rate decreases since the demand curve for financial capital shifts to the left.
O B. The equilibrium interest rate increases since the demand curve for financial capital shifts to the right.
O C. The equilibrium interest rate increases since the supply curve for financial capital shifts to the left.
O D. The equilibrium interest rate decreases since the supply curve for financial capital shifts to the right.

Expert Solution

Step 1

An expansion in the fiscal deficit, in principle, can help a languid/sluggish economy by giving more cash supply to individuals who would then be able to purchase and contribute more. Long haul deficits, notwithstanding, can be impeding for monetary development and security. At the point when an expansion in government expenses or an abatement in government income builds the budget deficit, the Treasury should sell more bonds. This diminishes the price of securities/bonds, resulting in raising the rate of interest. According to the question Yemen economy facing the budget deficit, so that will increase the rate of interest as demand for the financial capital increases.

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