How might an increase in the central bank's discount rate affect private sector investment in an environment of rising government debt?

When the central bank raises the discount rate, banks find it costlier to borrow from the central bank and therefore raise the rates they charge on loans. This makes it more expensive for businesses to finance new projects, so many firms postpone or cancel investment plans. In an environment where government debt is rising, the government is borrowing more, which already pushes up market interest rates; the higher discount rate compounds this effect. For example, a manufacturing firm that wanted to buy a new machine now faces a higher loan rate and decides to delay the purchase. Consequently, overall private sector investment declines as borrowing costs climb.