Author Question: According to the Ricardo-Barro effect, if the government runs a budget deficit of 100 billion, by ... (Read 111 times)

xroflmao · **on:** Jun 29, 2018

According to the Ricardo-Barro effect, if the government runs a budget deficit of 100 billion, by how much does the amount of equilibrium investment increase or decrease?

What will be an ideal response?

Question 2

Along the short-run Phillips curve SRPC0 the expected inflation rate is

A) 7 percent.
B) 3 percent.
C) 6 percent.
D) an amount that can be determined from the figure, but none of the above answers is correct.
E) an amount that cannot be determined from the figure.

milbourne11 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Equilibrium investment does not increase or decrease. There is no change in the amount of investment because private saving changes to precisely offset the government budget deficit. In other words, the 100 billion deficit leads to an increase in private saving of 100 billion which exactly matches the increase in the demand for loanable funds. As a result, neither the equilibrium real interest rate nor the equilibrium amount of loanable funds changes.

Answer to Question 2

B