According to the Ricardo-Barro effect,
A) a government budget deficit crowds out private investment.
B) the government budget has no effect on the real interest rate.
C) financing government spending with taxes has a less severe effect on private investment than financing through government borrowing.
D) None of the above answers are correct.

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 debt and increase their savings accordingly, offsetting the government's borrowing.

According to the Ricardo-Barro Effect