If the Ricardo-Barro effect occurs, an ________ in saving finances the government budget deficit and the real interest rate ________.
A) increase; remains the same
B) decrease; increases
C) increase; falls
D) decrease; remains the same

Question

Quizplus · Accepted Answer

The Ricardo-Barro effect posits that when the government increases its borrowing, individuals will save more to pay for future tax liabilities, thus offsetting the government's deficit spending. As a result, the real interest rate remains unchanged because the increase in demand for loanable funds by the government is matched by an increase in supply of loanable funds from private saving.

If the Ricardo-Barro Effect Occurs, an ________ in Saving Finances