In the absence of a Ricardo-Barro effect, a government budget deficit the demand for loanable funds, the real interest rate, and investment.
A) decreases; increases; increases
B) increases; decreases; increases
C) decreases; increases; crowds out
D) increases; decreases; crowds out

Question

Quizplus · Accepted Answer

In the absence of a Ricardo-Barro effect, a government budget deficit increases the demand for loanable funds, which leads to an increase in the real interest rate. As the real interest rate increases, it crowds out private investment, resulting in a decrease in investment. Therefore, the correct choice is C.

In the Absence of a Ricardo-Barro Effect, a Government Budget