In the absence of the Ricardo-Barro effect, an increase in the government deficit results in a
Real interest rate and a equilibrium quantity of investment.
A) higher; higher
B) lower; lower
C) higher; lower
D) lower; higher

Question

Quizplus · Accepted Answer

In the absence of the Ricardo-Barro effect, an increase in the government deficit results in higher demand for borrowing, which leads to an increase in the real interest rate. This increase in the real interest rate reduces the quantity of investment demanded, leading to a lower equilibrium quantity of investment. Therefore, the correct answer is C - higher real interest rate and lower equilibrium quantity of investment.

In the Absence of the Ricardo-Barro Effect, an Increase in the Government