Explain how a government budget deficit might crowd out private ...

[CBme]

Explain how a government budget deficit might crowd out private investment.
 
  What will be an ideal response?

Question 2

Because money growth is a major component determining the inflation rate, in order to forecast inflation we should forecast actions by the
 
  A) Congress.
  B) President.
  C) Fed.
  D) Office of the Treasury.
  E) U.S. Mint.

[elizabethrperez]

Answer to Question 1

If there is no Ricardo-Barro effect, a government budget deficit increases the demand for loanable funds. As a result, the equilibrium real interest rate rises and the equilibrium quantity of loanable funds increases. But the rise in the real interest rate decreases investment. The government's budget deficit has thus crowded out investment.

Answer to Question 2

C