The Ricardo-Barro Effect Argues That the Crowding-Out Effect

question 109

Multiple Choice

The Ricardo-Barro effect argues that the crowding-out effect

• A)is the result of a government budget surplus and higher interest rates.
• B)is stronger when the government runs a budget surplus than when it runs a budget deficit.
• C)is the result of the government budget deficit and higher interest rates.
• D)will occur, because the private saving supply will change to offset any change in the government budget deficit.
• E)will not occur, because the private saving supply will change to offset any change in the government budget deficit.

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Definitions:

Bondholders

Individuals or entities that hold debt securities issued by corporations or governments, entitling them to interest payments and the principal investment return at maturity.

Creditors

Individuals, businesses, or financial institutions that lend money or extend credit to others, expecting to be repaid with interest in the future.

Municipal Bonds

Debt securities issued by local governments or their agencies, often tax-exempt, to fund public projects and services.

Federal Income Tax

A tax levied by the U.S. federal government on the annual earnings of individuals, corporations, trusts, and other legal entities.