According to the Ricardo-Barro effect, an increase in the government budget deficit
A)shifts the supply of loanable funds curve leftward.
B)shifts the demand for loanable funds curve leftward.
C)lowers the real interest rate.
D)does not change the real interest rate.
E)has no effect on the nominal interest rate but does change the real interest rate.

Question

Quizplus · Accepted Answer

The Ricardo-Barro effect suggests that individuals anticipate future taxes to pay off government debt, leading them to save more. This increased saving offsets the government's borrowing, leaving the real interest rate unchanged.

According to the Ricardo-Barro Effect, an Increase in the Government