Question 1

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?

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.

Question 2

If the Ricardo-Barro effect occurs, ________ in private saving finances the government budget deficit, and the real interest rate ________.

Accepted Answer

The Ricardo-Barro effect occurs when people anticipate future taxes from the government to pay off the government deficit. As a result, private saving increases to finance the government deficit. This increase in private saving will put downward pressure on interest rates, which will remain the same as a result of increased loanable funds.

Question 3

Table 23.3.5
 
-Refer to Table 23.3.5. The table shows an economy's demand for loanable funds schedule and supply of loanable funds schedule when the government's budget is balanced. If the government budget surplus is $2.0 trillion, the real interest rate is ________ percent a year, the quantity of investment is ________ trillion, and the quantity of private saving is ________ trillion.

Accepted Answer

A government budget surplus increases the supply of loanable funds. With a surplus of $2.0 trillion, the new supply of loanable funds will be $12.5 trillion ($10.5 trillion + $2.0 trillion). At an interest rate of 6%, the quantity of investment demanded is $7.5 trillion and the quantity of private saving supplied is $7.5 trillion. Therefore, the answer is E.

Question 4

According to the Ricardo-Barro effect,

Accepted Answer

The Ricardo-Barro effect suggests that when the government runs a budget deficit, households anticipate future tax increases to pay off the debt, leading them to increase their savings to offset the expected future tax burden.

Question 5

A decrease in the government budget deficit decreases the ________ loanable funds and an increase in the government budget surplus increases the ________ loanable funds.

Accepted Answer

The answer of A decrease in the government budget deficit...

Question 6

Choose the statement that is incorrect.

Accepted Answer

Most economists do not believe that the Ricardo-Barro effect holds in the market for loanable funds, as it assumes perfect foresight and rationality among taxpayers, which is often not the case in reality.

Question 7

According to the Ricardo-Barro effect,

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 debt and increase their savings, offsetting the government's borrowing.

Question 8

Use the table below to answer the following question.
Table 23.3.1
Data from Northland
 
-Refer to Table 23.3.1. Table 23.3.1 shows the market for loanable funds in Northland. The government budget is balanced. If the government moves from a balanced budget to a surplus of $20 billion, the new equilibrium has a real interest rate of ________ percent and quantity of loanable funds traded equal to ________.

Accepted Answer

A government surplus increases the supply of loanable funds, leading to a lower equilibrium interest rate and a higher quantity of loanable funds traded.

Question 9

Table 23.3.3
 
-Refer to Table 23.3.3. The table shows the demand for loanable funds schedule and the private supply of loanable funds schedule when the government's budget is balanced. If the Ricardo-Barro effect occurs, and if the government budget deficit is $2.0 trillion, the real interest rate is ________ percent a year and the quantity of investment is ________ trillion.

Accepted Answer

The answer of Table 23.3.3
 
-Refer to Table 23.3.3. The...

Question 10

The government of Greece is running a large budget deficit. With no Ricardo-Barro effect, which of the following events will occur?
I. The supply curve of loanable funds will shift leftward.
II. A higher real interest rate crowds out investment.
III. Saving increases.

Accepted Answer

With no Ricardo-Barro effect, the government's budget deficit will increase the demand for loanable funds, leading to a higher equilibrium interest rate. As a result, the supply curve of loanable funds will shift leftward (I) and a higher real interest rate will crowd out investment (II). Since the budget deficit implies that the government is consuming more than it is producing, it cannot lead to an increase in national saving, so III is incorrect.

Question 11

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 real interest rate?

Accepted Answer

The answer of Use the table below to answer the...

Question 12

The Ricardo-Barro effect of a government budget deficit is

Accepted Answer

The Ricardo-Barro effect suggests that when the government runs a budget deficit, individuals anticipate future taxes to pay off the debt, leading them to increase their private saving to offset the government's borrowing.

Question 13

Table 23.3.2
 
-Refer to Table 23.3.2. The table shows an economy's demand for loanable funds and supply of loanable funds schedules when the government's budget is balanced. The quantity of loanable funds demanded increases by $1 trillion at each real interest rate and the quantity of loanable funds supplied increases by $2 trillion at each real interest rate. If the government wants investment to be $9 trillion, it must ________ its budget balance by ________ trillion.

Accepted Answer

The answer of Table 23.3.2
 
-Refer to Table 23.3.2. The...

Question 14

Table 23.3.4
 
-Refer to Table 23.3.4. The table shows an economy's demand for loanable funds schedule and the private supply of loanable funds schedule when the government's budget is balanced. If the government budget deficit is $1.0 trillion, the real interest rate is ________ percent a year, the quantity of investment is ________ trillion, and the quantity of private saving is ________ trillion.

Accepted Answer

The answer of Table 23.3.4
 
-Refer to Table 23.3.4. The...

Question 15

A government budget surplus occurs, which ________ loanable funds. The real interest rate ________, household saving ________, and investment ________.

Accepted Answer

The answer of A government budget surplus occurs, which ________...

Question 16

In the market for loanable funds, a larger government surplus leads to

Accepted Answer

A larger government surplus increases the supply of loanable funds, which typically leads to a lower real interest rate, encouraging more investment.

Question 17

Use the table below to answer the following questions.
Table 23.3.7
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 23.3.7. If the government's budget becomes a deficit of $1.0 trillion, what is the quantity of investment?

Accepted Answer

The quantity of investment is determined by the level of savings in the economy. If the government's budget becomes a deficit of $1.0 trillion, it reduces the amount of national savings available for investment. Assuming the initial savings were $8.5 trillion (from the choices), a $1.0 trillion deficit would reduce available savings to $7.5 trillion, which is the quantity of investment.

Question 18

According to the Ricardo-Barro effect, government deficits

Accepted Answer

The Ricardo-Barro effect suggests that government deficits do not affect the equilibrium real interest rate or investment because individuals increase their savings in anticipation of future taxes needed to pay off the deficit.

Question 19

If the Ricardo-Barro effect occurs, a government budget deficit raises the equilibrium real interest rate by ________ and decreases the equilibrium quantity of investment by ________ if the Ricardo-Barro effect is absent.

Accepted Answer

The answer of If the Ricardo-Barro effect occurs, a government...

Question 20

The Ricardo-Barro effect holds that

Accepted Answer

The Ricardo-Barro effect suggests that a government budget deficit does not affect the real interest rate because people anticipate future taxes to pay off the debt and increase their savings accordingly, offsetting the deficit's impact.

Quiz 23: Finance, Saving, and Investment

If the Ricardo-Barro effect occurs, in private saving finances the government budget deficit, and the real interest rate .

According to the Ricardo-Barro effect,

A decrease in the government budget deficit decreases the loanable funds and an increase in the government budget surplus increases the loanable funds.

Choose the statement that is incorrect.

According to the Ricardo-Barro effect,

The government of Greece is running a large budget deficit. With no Ricardo-Barro effect, which of the following events will occur? I. The supply curve of loanable funds will shift leftward. II. A higher real interest rate crowds out investment. III. Saving increases.

The Ricardo-Barro effect of a government budget deficit is

A government budget surplus occurs, which loanable funds. The real interest rate , household saving , and investment .

In the market for loanable funds, a larger government surplus leads to

According to the Ricardo-Barro effect, government deficits

If the Ricardo-Barro effect occurs, a government budget deficit raises the equilibrium real interest rate by and decreases the equilibrium quantity of investment by if the Ricardo-Barro effect is absent.

The Ricardo-Barro effect holds that