With no Ricardo-Barro effect, a government budget surplus

Question

Quizplus · Accepted Answer

Without the Ricardo-Barro effect, a government budget surplus means that the government is saving more than it is investing. This increases the supply of loanable funds available to private investors. Since there is more supply than demand, the real interest rate will decrease in order to encourage more borrowing and investment. Therefore, a government budget surplus increases the supply of loanable funds and lowers the real interest rate.

With No Ricardo-Barro Effect, a Government Budget Surplus