Question

Explain how decreased domestic investments that occur due to a budget deficit will affect future economic growth.

Short answer

Reduced capital investment will slow future economic growth since huge amounts of new, well-maintained capital will be unavailable for expanding sectors.

Step-by-step solution

Definition

Budget Deficit:

The government borrows money to cover a budget deficit. As a result of the increased demand for government loans, interest rates in the country increases. This increase in interest rate contributes to reduced investment by businesses.

Step 2:Explanition

Reduced capital investment will restrict future economic growth since massive volumes of new, well-maintained capital will be unavailable for increasing industries. Budget deficits weaken national savings, which leads to a decrease in private investment. However, because increased consumption means less saving and, as a result, less investment, the economy's size will diminish in the future. People will be able to consume less in the future as a result of this.