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Country P's government finances a wider budget deficit by borrowing at home. Other things equal, which of the following are likely? I. It competes with private borrowers for savings. II. Prices of existing bonds tend to rise. III. Interest rates tend to rise. IV. Some private investment is crowded out.
When a government borrows more at home, it competes with firms and households for the same pool of savings (Statement I). Other things equal, the extra borrowing pushes interest rates up (Statement III), and some private projects that were worth financing at the old rate are dropped: this is crowding out (Statement IV). Statement II is wrong: higher market interest rates lower the prices of existing fixed-rate bonds, because their coupons are now less attractive than those on new issues. Source: Standard economics (market for loanable funds; crowding out) (as at October 2026).
Forgetting the price side. Higher rates from heavy government borrowing mean lower, not higher, prices for bonds already in issue.
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