If the AS and the AD curve intersect at a level of real GDP that ...

[silviawilliams41]

If the AS and the AD curve intersect at a level of real GDP that exceeds potential GDP, then the appropriate monetary policy is one that ________ the federal funds rate and ________ aggregate demand.
 
  A) raises; increases
  B) lowers; decreases
  C) raises; has no effect on
  D) lowers; increases
  E) raises; decreases

Question 2

According to the Ricardo-Barro effect, what is the effect on the real interest rate of a government budget surplus?
 
  What will be an ideal response?

[Laurenleakan]

Answer to Question 1

E

Answer to Question 2

The government budget surplus, by itself, increases the supply of loanable funds. However the Ricardo-Barro effect asserts that people decrease their private saving by the exactly same amount. This change precisely offsets the effect the government budget surplus has on the supply of loanable funds. Thus a government surplus has no effect on the equilibrium real interest rate.