If China's government runs a budget surplus and there is no Ricardo-Barro effect, there will be ________ in the supply of loanable funds, private saving ________ and investment ________.
A) an increase; decreases; increases
B) a decrease; increases; increases
C) an increase; increases; increases
D) a decrease; decrease; increases

Question

Quizplus · Accepted Answer

When a government runs a budget surplus, it means it is saving more than it is spending, which increases the supply of loanable funds. Without the Ricardo-Barro effect, which posits that private saving adjusts to offset government saving or borrowing, private saving decreases because individuals expect future taxes to be lower. With more loanable funds available, investment increases due to lower interest rates.

If China's Government Runs a Budget Surplus and There Is