According to the Ricardian equivalence proposition,
A)saving equals investment only at full employment.
B)a decline in the demand for money results in an equivalent increase in the demand for nonmoney assets.
C)the increase in current income from a tax cut is offset by higher taxes in the future to pay off the debt.
D)government spending is the equivalent of investment spending.

Question

Quizplus · Accepted Answer

The Ricardian equivalence proposition suggests that if a government finances a tax cut with borrowed money, there will be no net effect on aggregate demand because consumers will recognize that the tax cut merely represents a reduction in future taxes needed to pay off the debt. Therefore, the increase in current income from a tax cut is offset by the expectation of higher taxes in the future to pay off the debt, leading to no change in overall consumption or investment.

According to the Ricardian Equivalence Proposition