Answer to Question #228749 in Macroeconomics for mjuuhb

Question

Assuming there is no Ricardo-Barro effect, a government budget deficit will____ the real interest rate and ____ the quantity of investment.

lower; decrease.

raise; increase.

raise; decrease.

lower; increase.

Answer 1

When there is a government budget deficit, the government debt is likely rise also. This results to the rise of interest rate.

Budget deficit means that the government is spending more than it is taking in. This results in decrease in national savings. When national savings decreases, investment is also likely to reduce.

raise; decrease.