Which group is directly affected by higher borrowing costs due to government borrowing?

• A. Public sector agencies
• B. Export firms
• C. Private borrowers
• D. Central banks

Answer: (C)

When the government borrows more, it competes for funds in the financial markets, increasing the demand for loanable funds. That higher demand pushes up interest rates, making borrowing more expensive for anyone who needs credit. The group most directly affected is private borrowers—households taking out mortgages or loans and firms financing investment—as they face higher costs to borrow. Public sector agencies are part of government borrowing themselves, and central banks aren’t typically borrowing in the same way from the market, so their funding costs aren’t driven in the same way. Export firms can feel the impact indirectly through higher rates and possible currency effects, but the immediate, direct impact lands on private borrowers.