Use the table below to answer the following questions.
Table 23.3.6
The table shows an economy's demand for loanable funds schedule and supply of loanable funds schedule when the government's budget is balanced.

-Consider Table 23.3.6. If the Ricardo-Barro effect occurs, and if the government's budget becomes a deficit of $2.0 trillion, what is the quantity of investment?

Question

Use the table below to answer the following questions.
Table 23.3.6
The table shows an economy's demand for loanable funds schedule and supply of loanable funds schedule when the government's budget is balanced.
 
-Consider Table 23.3.6. If the Ricardo-Barro effect occurs, and if the government's budget becomes a deficit of $2.0 trillion, what is the quantity of investment?

Quizplus · Accepted Answer

The Ricardo-Barro effect suggests that people will increase their savings when the government increases its deficit spending, in anticipation of future tax increases needed to pay off the debt. This means that the supply of loanable funds will increase, leading to a lower interest rate and a higher quantity of investment. In this case, if the government's budget becomes a deficit of $2.0 trillion, the supply curve for loanable funds will shift to the right, from S1 to S2. The new equilibrium point will be at an interest rate of 4% and a quantity of investment of $5.0 trillion. Therefore, the answer is D) $5.0 trillion.

Use the Table Below to Answer the Following Questions