Question

Indicate the correct answer and why, show work. Thank you

The table shows the demand for loanable funds schedule and the supply of loanable funds schedule when the government budget is balanced. If the government budget deficit is $1.0 trillion and the Ricardo-Barro effect occurs, what are the real interest rate and the Real Loanable funds Loanable funds interest rate demanded supplied quantity of investment? If the Ricardo-Barro effect occurs, and if the government budget deficit is $1.0 trillion, the real interest rate is percent a year and the quantity of investment is trillion Is there any crowding out in this situation? OA. Yes. Investment is $5.5 trillion but private saving is O B. No. Crowding out does not occur because government dissaving does not influence the real interest rate percent per year) (trilllons of 2009 dollars per year) 7.0 6.5 6.0 5.5 5.0 4.5 4.0 4.0 4.5 5.0 5.5 6.0 6.5 7.0 $6.5 trilion, which means that Investment is decreased by the amount of the government deficit.

Answer 1

Since the Ricardo Barro effect is in place, private savings will rise by the same amount as there is an increase in the demand for loanable funds so that there will be no change made in the market for loanable funds.

therefore the equilibrium real interest rate is it still 7% and the equilibrium quantity of loanable funds is still 5.5 trillion.

There will be no crowding out because private savings will match government dissaving. And there is no change in the real interest rate.