Suppose the government has a budget deficit of 2 billion. If the Ricardo-Barro effect is correct, then how much crowding out of investment occurs?
A) exactly equal to 2 billion dollars
B) more than 2 billion
C) some crowding out occurs, but less than 2 billion
D) No crowding out occurs and investment does not change.
E) No crowding out occurs because investment increases by 2 billion.
Question 2
The figure above shows the market for bank reserves in Futureland. If the Bank of Futureland undertakes an open market sale of government securities that changes the quantity of reserves by 25 billion, then the federal funds rate will
A) remain at 4 percent a year.
B) rise to 6 percent a year.
C) fall to 4 percent a year.
D) change, but more information is needed to determine by how much.
E) None of the above answers is correct.
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