A larger budget deficit a. raises the interest rate and investment. b. reduces the interest rate and investment. c. raises the interest rate and reduces investment. d. reduces the interest rate and raises investment.

The correct answer is letter "C": raises the interest rate and reduces investment.

Explanation:

Budget deficits are the situations in which organizations run out of money to continue handling their businesses. Under such scenarios, the interest rate is higher because the central bank, the Fed in the U. S., increases it to avoid an excess in borrowed money that could lead to an increase in the general prices with causes inflation. If interest rates are higher the demand for borrowed money would be moderate.

Budget deficits also cause investments to decrease because the less money a firm has, the more stagnant it projects remain.