Question

In the absence of a ricardo-barro effect, a government budget deficit ________ the demand for loanable funds, ________ the real interest rate, and ________ investment.

Answer 1

Under the Ricardo-Barro theory, the government is possible to increase taxes in the future in order to pay back the money borrowed to finance a current budget deficit. In a case where this effect is absent, the result would be:

A government budget deficit will increase the demand for loanable funds, increase the real interest rate, and decrease the investment.