The Ricardo-Barro effect holds that
A) equal increases in taxes and government expenditures have no effect on equilibrium real GDP.
B) government budget deficits have no effect on the real interest rate.
C) a government budget deficit crowds out private investment.
D) a government budget deficit induces a decrease in saving that magnifies the crowding out effect.

Question

Quizplus · Accepted Answer

The Ricardo-Barro effect suggests that government budget deficits do not affect the real interest rate because individuals anticipate future taxes to pay off the deficit and increase their savings accordingly, offsetting the government's borrowing.

The Ricardo-Barro Effect Holds That