Question

How would you expect larger budget deficits to affect private sector investment in physical capital? Why?

Short answer

The large budget deficits cause increase within the demand for capital which pushes up the speed of interest and make the private sector investment more costly.

Step-by-step solution

Concept Introduction 

(G-T) is that the deficit for a specified period of your time. Any increase in government deficit will affect the economy in some ways. Basically, deficit is defined because the amount within which the spending of the govt. is bigger than revenue collected through taxes.

Explanation of Solution  

When there's a high increase in budget deficits, it implies that the less amount of economic capital are going to be available for the private firms for the investment in physical capital. Due to more deficits of income over expenditure, the investment of physical capital will fall because the expenditure are going to be high and that they wouldn't be ready to bridge the gap between income and expenditure.