The Ricardo-Barro effect holds that
A) a government budget deficit induces a decrease in saving that magnifies the crowding out effect.
B) government budget deficits have no effect on the real interest rate.
C) equal increases in taxes and government expenditures have no effect on equilibrium real GDP.
D) a government budget deficit crowds out private investment.

Question

Quizplus · Accepted Answer

The Ricardo-Barro effect suggests that government budget deficits do not affect the real interest rate because individuals anticipate future taxes to pay off the deficit and increase their savings accordingly, offsetting the government's borrowing.

The Ricardo-Barro Effect Holds That