Choose the correct statement. A. Most economists believe that the Ricardo-Barro effect holds in the loanable funds market. B. A
ccording to the Ricardo-Barro effect, rational taxpayers know that a budget deficit today means that future taxes will be higher and future disposable incomes will be smaller. C. According to the Ricardo-Barro effect, a government budget deficit leads to the crowding-out effect. D. According to the Ricardo-Barro effect, a budget deficit raises the real interest rate.
The correct answer and the letter b. According to the Ricardo-Barro effect, rational taxpayers know that a budget deficit today means that future taxes will be higher and future disposable incomes will be smaller.
Explanation:
The Ricardo-Barro effect, also called Ricardian equivalence, stresses that budget deficits are not financed by public debt or taxes do not affect consumption because they decrease disposable income. The Ricardo-Barro effect is on tax equivalence and public debt, that is, it shows that if the government incurs a public deficit, rational agents will realize that in the future it will be necessary to raise taxes or issue public bonds to finance the public deficit. In this way, rational agents will save to pay the future taxes needed to control the deficit, which will lead to lower disposable income.
