The idea that government budget deficits do not matter under certain circumstances is
A) called the Friedman-Lucas theory.
B) preposterous.
C) called the Ricardian equivalence theorem.
D) called the Milton Friedman theory.
E) attributed to Edward Prescott and Finn Kydland.

Question

Quizplus · Accepted Answer

The idea that government budget deficits do not matter under certain circumstances is called the Ricardian equivalence theorem. This theory suggests that individuals may anticipate that the government will eventually raise taxes in order to pay off the debt, and so they will save more in order to pay those future taxes. As a result, increased government spending financed by borrowing would not have much stimulative effect on the economy, and so deficits would not matter much in terms of their impact on economic growth.

The Idea That Government Budget Deficits Do Not Matter Under