In the absence of the Ricardo-Barro effect, an increase in the government deficit results in a ________ real interest rate and a ________ equilibrium quantity of investment.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower

Question

Quizplus · Accepted Answer

In the absence of the Ricardo-Barro effect, an increase in government deficit leads to higher real interest rates as the government borrows more, crowding out private investment. This, in turn, results in a lower equilibrium quantity of investment due to the higher cost of borrowing.

In the Absence of the Ricardo-Barro Effect, an Increase in the Government