What is the Ricardo-Barro effect and how does it modify the crowding-out effect?
What will be an ideal response?
The Ricardo-Barro effect points out that the crowding out effect is less than predicted by looking only at the effect of a budget deficit on the demand for loanable funds. The Ricardo-Barro effect asserts that as a result of a government budget deficit households increase their saving to pay the higher taxes that will be needed in the future to repay the debt issued to fund the deficit. The increase in saving increases the supply of loanable funds. This increase in the supply of loanable funds offsets the rise in the real interest rate from the increase in the demand for loanable funds caused by the budget deficit. Because the real interest rate does not rise as much, the decrease in investment, that is the amount of crowding out, is less in the presence of the Ricardo-Barro effect.
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An increase in the price of steel to car manufacturers will cause
A) the quantity demanded for cars to increase. B) the demand for cars to decrease. C) the quantity supplied of cars to increase. D) the supply curve for cars to shift left.
A country could correct a balance-of-payments surplus by
A. Expansionary fiscal policy. B. Contractionary monetary policy. C. Decreasing the money supply. D. Increasing tariffs on imported goods.