If there is no Ricardo-Barro effect, a government budget surplus

Question

Quizplus · Accepted Answer

In the absence of the Ricardo-Barro effect, a government budget surplus does not lead to an increase in private saving, which means that the supply of loanable funds does not decrease. Instead, the government budget surplus increases the amount of funds available for lending, which leads to an increase in the supply of loanable funds. This shift in the supply of loanable funds leads to a decrease in the real interest rate and an increase in investment and consumption, which results in an increase in the demand for loanable funds. Therefore, choice A, which states that a government budget surplus increases the supply of loanable funds, is the correct answer.

If There Is No Ricardo-Barro Effect, a Government Budget Surplus