With no Ricardo-Barro effect, a government budget surplus
A) increases the demand for loanable funds and raises the real interest rate.
B) increases the supply of loanable funds and lowers the real interest rate.
C) decreases the demand for loanable funds and increases the real interest rate.
D) increases the demand for loanable funds and lowers the real interest rate.
E) decreases the supply of loanable funds and lowers the real interest rate.

Question

Quizplus · Accepted Answer

A government budget surplus increases the supply of loanable funds in the economy because the government is borrowing less (or repaying debt), which typically leads to a lower real interest rate.

With No Ricardo-Barro Effect, a Government Budget Surplus