Do you see a link between deficits and real interest rates

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Keynesian theory predicts that expansionary fiscal policy-either higher spending or lower taxes-will raise the real interest rate. Using data since 1960, graph the Federal government budget deficit, the state-local government budget deficit (both relative to GDP), and the real interest rate (three-month Treasury bill rate minus the CPI inflation rate over the preceding twelve-month period). Do you see a link between deficits and real interest rates? In what period does the relationship seem clearest? Do your answers change when the ten-year government bond interest rate is used instead of the three-month rate?

Reference no: EM131131318

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