If the Ricardo-Barro effect occurs, what are the real interest rate and investment?

Use the data in Problem 8 along with news that the government now has a budget deficit of $1 trillion to work Problems.

Problem 8

The table sets out the data for an economy when the government’s budget is balanced.

a. Calculate the equilibrium real interest rate, investment, and private saving.

b. If planned saving increases by $0.5 trillion at each real interest rate, explain the change in the real interest rate.

c. If planned investment increases by $1 trillion at each real interest rate, explain the change in saving and the real interest rate.

Transcribed Image Text:

Real interest rate (percent per year) 4567899 10 Loanable funds demanded Loanable funds supplied (trillions of 2012 dollars) 5.5 6.0 6.5 7.0 7.5 8.0 8.5 8.5 8.0 7.5 7.0 6.5 6.0 5.5