If the Ricardo-Barro effect is present, a government budget deficit raises the equilibrium real interest rate by ________ and decreases the equilibrium quantity of investment by ________ than if the Ricardo-Barro effect is absent.
A) more; more
B) more; less
C) less; more
D) less; less

Question

Quizplus · Accepted Answer

The Ricardo-Barro effect suggests that individuals anticipate future taxes to pay off government debt, leading them to save more. This increased saving offsets the government's deficit spending, resulting in a smaller impact on the real interest rate and investment compared to when the effect is absent.

If the Ricardo-Barro Effect Is Present, a Government Budget Deficit