What does the Ricardo-Barro Effect predict?
A)Government budget deficits crowd out private investment.
B)There is no way to explain animal spirits or irrational exuberance.
C)Net investment and gross investment will be equal.
D)Private saving will offset the impact of government borrowing.
E)The level of saving in a developed economy will be very low.

Question

Quizplus · Accepted Answer

The Ricardo-Barro Effect, also known as Ricardian Equivalence, suggests that when a government increases its budget deficit, individuals will increase their savings to offset the expected future tax increases needed to repay the debt, thus neutralizing the impact of government borrowing on the economy.

What Does the Ricardo-Barro Effect Predict