Discuss why a budget deficit results in a different real interest rate under the Ricardo-Barro effect than under the crowding-out effect
What will be an ideal response?
The Ricardo-Barro effect holds that a budget deficit has no effect on real interest rates. A government budget deficit increases the demand for loanable funds. The Ricardo-Barro effect argues that rational taxpayers know that a budget deficit today means higher taxes tomorrow. As a result, taxpayers increase their savings today. The higher private saving increases the supply of loanable funds. Because both the demand for loanable funds and the supply of loanable funds increase by the same amount, there is no change in the real interest rate.
The crowding-out effect holds that a budget deficit increases real interest rates. The crowding-out effect argues that a budget deficit has no effect on the supply of loanable funds. Hence only the demand for loanable funds increases so that the real interest rate rises.
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Per capita GDP in the U.S. during the 20th century _____
a. has remained about the same b. increased until about 1970 and decreased since then c. was cyclical, but generally trending upward throughout the century d. was cyclical, but generally trending downward throughout the century
Market participants are likely to save a portion of current income if they
A. Believe that banks might fail. B. Place a higher value on current consumption than on future consumption. C. Place a higher value on future consumption than on current consumption. D. Believe that money will lose much of its value in the future. In deciding to save rather than spend, people effectively reallocate their spending over time. That is, people save now in order to spend more in the future.
Why is a woman buying cosmetics at a department store considered a component of the product market?
a. A firm is selling products to a household. b. The purchase is regulated by the federal government. c. The product cannot be purchased anywhere else. d. The purchase price is presumably a small portion of her income.
Which statement is FALSE?
A. Rent control is a price ceiling. B. Usury laws can lead to a surplus of loanable funds. C. The government, to encourage family farms to stay in business, created price supports for corn and wheat. D. Price ceilings prevent prices from rising.