With no Ricardo-Barro effect, a government budget surplus

Question

Quizplus · Accepted Answer

Without the Ricardo-Barro effect, the government budget surplus does not affect private saving or consumption decisions, and therefore it increases the supply of loanable funds available in financial markets. This is because a budget surplus means that the government is borrowing less from private savers, leaving them with more funds to lend out. Consequently, this increase in the supply of loanable funds leads to lower interest rates and higher investment levels.

With No Ricardo-Barro Effect, a Government Budget Surplus