If the Ricardo-Barro effect is present, a government budget deficit raises the equilibrium real interest rate by and decreases the equilibrium quantity of investment by than if the Ricardo-Barro effect is absent.
A) less; less
B) more; more
C) less; more
D) more; less

Question

Quizplus · Accepted Answer

The Ricardo-Barro effect suggests that individuals anticipate future taxes to pay off government debt, leading them to save more. This increased saving offsets the government's deficit spending, resulting in a smaller impact on interest rates and investment compared to when the effect is absent.

If the Ricardo-Barro Effect Is Present, a Government Budget Deficit