Help needed! I am really confused by what this question really implies.
Qn: What would be the effect if the government used a budget surplus to pay off its debt?
(a) Interest rates would rise
(b) The crowding out effect would become larger
(c) The supply of loanable funds in the market would increase
(d) Most borrowers would leave the loanable funds market
(e) Demand for loanable funds would increase
Can someone clarify this question for me? My best bet for this question is that If the government used a budget surplus to pay off it debt, then a greater supply of loanable funds would be readily made available for other borrowers, thus the supply of loanable funds in the market would increase. (C)
But at the same time since interest rates fall Demand for loanable funds would also increase since interest rates falls which boosts consumption and investment spending, so i'm kind of unsure what is the best option here.
Any help would be greatly appreciated. Thank you!