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Why do some economists argue that federal government budget deficits contribute to increased market rates of interest and red
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When government deficit occurs then government issue more bonds and take loans from the market. Since capital is limited when government takes loans it crowds out the supply of funds to the economy. This crowding out decreases the supply of loanable funds for private investment. Decrease in supply of loans causes interest rates to go up.Hence demand for loanable funds also decreases and investment decreases.

Internal debt occurs when government borrows money from its own economy or people .This leads to problem of crowding out and interest rate goes up. However it can help boost the welfare schemes in an economy because money will distributed from the rich to the poor through internal debt.
External debt occurs when there is sovereign borrowing from other countries.Since interest payments are made to foreign countries, this causes burden on the domestic economy. The government might have to increase taxes for that.This may slowdown the economy.

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