In the absence of a Ricardo-Barro effect, a government budget deficit ________ the demand for loanable funds and ________ investment.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

Question

Quizplus · Accepted Answer

In the absence of a Ricardo-Barro effect, a government budget deficit increases the demand for loanable funds as the government borrows more, which typically leads to higher interest rates. Higher interest rates, in turn, decrease investment because borrowing costs for businesses and individuals become more expensive.

In the Absence of a Ricardo-Barro Effect, a Government Budget