According to the Ricardo-Barro effect, government deficits
A) lead to a rise in the equilibrium real interest rate, crowding out investment.
B) lead to simultaneous increases in private saving and no effect on the equilibrium real interest rate and investment.
C) lead to simultaneous decreases in private saving and decreases in the equilibrium real interest rate and investment.
D) lead to a fall in the equilibrium real interest rate and a rise in investment.

Question

Quizplus · Accepted Answer

The Ricardo-Barro effect, also known as Ricardian equivalence, posits that government deficits do not affect the overall level of investment in the economy because individuals anticipate future taxes to pay for the deficits and increase their savings to offset government spending, leaving the equilibrium real interest rate and investment unchanged.

According to the Ricardo-Barro Effect, Government Deficits