If there is no Ricardo-Barro effect, an increase in the budget deficit
A)increases the supply of loanable funds.
B)decreases the amount of investment.
C)decreases the demand for loanable funds.
D)increases the amount of investment.
E)lowers the equilibrium real interest rate.

Question

Quizplus · Accepted Answer

Without the Ricardo-Barro effect, an increase in the budget deficit leads to higher government borrowing, which increases the demand for loanable funds, raises interest rates, and crowds out private investment, thus decreasing the amount of investment.

If There Is No Ricardo-Barro Effect, an Increase in the Budget