The Ricardo-Barro effect argues that the crowding-out effect
A)is the result of a government budget surplus and higher interest rates.
B)is stronger when the government runs a budget surplus than when it runs a budget deficit.
C)is the result of the government budget deficit and higher interest rates.
D)will occur, because the private saving supply will change to offset any change in the government budget deficit.
E)will not occur, because the private saving supply will change to offset any change in the government budget deficit.

Question

Quizplus · Accepted Answer

The Ricardo-Barro effect suggests that private saving adjusts to offset government budget deficits, implying that crowding out does not occur because individuals anticipate future taxes to pay off the deficit and save more, leaving total savings unchanged.

The Ricardo-Barro Effect Argues That the Crowding-Out Effect