Question: The budget proposal submitted by the Bush administration in 2006 projected increasing deficits over time, that is, a growing gap between expenditures and revenues. A contentious debate ensued. On one side, critics of the administration argued that larger deficits would lead to higher interest rates, while some supporters of the administration argued that it would have no impact on interest rates. The following table gives some historical data on deficits and interest rates. For each year, the deficit is the difference between revenues and expenditures measured in current dollars; a negative figure is a deficit, and a positive figure is a surplus.
On the basis of these data, what inference could you make about the relationship between federal deficits and interest rates? Explain why inferences based on these data alone might be problematic.