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According to the Ricardo-Barro effect,A)taxpayers fail to foresee that government deficits imply higher future taxes.B)a government...

According to the Ricardo-Barro effect,A)taxpayers fail to foresee that government deficits imply higher future taxes.B)a government deficit decreases the supply of loanable funds.C)government deficits raise the real interest rate.D)government budget deficits increase households' expected future disposable income.E)households increase personal saving when governments run budget deficits.Topic:Government in the Market for Loanable Funds106)The Ricardo-Barro effect of a government budget deficit isTopic:Government in the Market for Loanable Funds107)The Ricardo-Barro effect holds thatTopic:Government in the Market for Loanable Funds

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Answer #1

Accordingto the Ricardo- Barro effect,

(E): households increase personal saving when governments run budget deficits.

Ricardo- Barro effect:

It is a macroeconomic concept that postulates that when a government runs a budget deficit, households and firms will respond by increasing their level of savings. This behavior allows the aggregate savings of an economy to remain unchanged.

Under the Ricardo-Barro theory, the government is likely to increase taxes in the future in order to repay the money being borrowed to finance a current budget deficit. As a result, households and firms will increase their current level of savings in order to afford to pay higher taxes in the future.


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