Final answer:
A government budget surplus increases the supply of loanable funds, leading to a fall in the real interest rate, a decrease in household saving, and an increase in investment.
Step-by-step explanation:
When a government runs a budget surplus, it essentially means that its revenues exceed its expenditures, allowing it to pay down debt or accumulate savings.
This situation increases the supply of loanable funds in the financial markets because the government is putting money into the market rather than taking it out.
As a result, the supply curve for loanable funds shifts to the right, leading to a lower equilibrium real interest rate. A lower interest rate encourages more investment since borrowing costs are cheaper, but it can also lead to a decrease in household saving because the return on savings is reduced.
Thus, in response to the prompt, the correct answer is that the real interest rate falls, household saving decreases, and investment increases.