Question #3

Budget deficits

• put downward pressure on short-term interest rates because they increase bank reserves in aggregate which then stimulate competition in the Interbank market.
• put upward pressure on interest rates because the government is competing for scarce savings that could be invested elsewhere.
• have no implications for interest rates because the ratings agencies basically set the risk rating of public debt.

Answer #7

Answer: put downward pressure on short-term interest rates because they increase bank reserves in aggregate which then stimulate competition in the Interbank market.

Explanation

Please see Deficit spending 101 - Part 3 if you are still wondering why the correct answer is one.