France's government is running a budget deficit. With no Ricardo- Barro effect, which of the following events will occur?
i. The supply curve of loanable funds will shift leftward.
ii. A higher real interest rate crowds out investment.
iii. Saving increases.

Question

Quizplus · Accepted Answer

With no Ricardo-Barro effect, a government running a budget deficit will increase demand for loanable funds, which leads to a higher real interest rate and crowds out investment. This will increase savings as people will have more incentives to save due to the higher interest rate. Therefore, choice ii and iii will occur. However, there is no reason to believe that the supply of loanable funds will shift leftward, so choice i is not applicable.

France's Government Is Running a Budget Deficit