Franceʹs 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.
A) i only.
B) ii and iii.
C) iii only.
D) i and ii.

Question

Quizplus · Accepted Answer

Without the Ricardo-Barro effect, the government's deficit spending will increase demand for loanable funds, pushing up interest rates. This increase in interest rates will crowd out private investment, reducing the supply of loanable funds. However, it is unlikely that saving will increase, as households may simply respond to higher interest rates by consuming less and saving more, rather than increasing their overall saving rate. Therefore, only options ii and iii are likely to occur.

Franceʹs Government Is Running a Budget Deficit