An important reason why Ricardian equivalence may fail is if
A) borrowing and lending is done through intermediaries.
B) government debt incurred today may not be paid off until after some current consumers are deceased.
C) state and local governments also engage in debt finance.
D) some consumers are borrowers, while other consumers are lenders.
E) real interest rates start to increase.

Question

Quizplus · Accepted Answer

Ricardian equivalence assumes that consumers have perfect foresight and will save today to pay for future tax liabilities. However, in reality, some government debt may not be paid off until after some current consumers are deceased, meaning they will not bear the burden of the debt directly. This could lead to a failure of Ricardian equivalence as those consumers may not fully adjust their consumption and savings behavior in response to changes in government borrowing.

An Important Reason Why Ricardian Equivalence May Fail Is If