According to the Ricardian equivalence theorem, government deficits do not affect the level of output because people:
A)do not understand the relationship between deficits and aggregate demand.
B)know that current deficits must be paid in the future and therefore reduce savings today.
C)recognize that current deficits must be paid by future generations and therefore spend more today.
D)recognize that current deficits must be paid in the future and therefore increase savings today to pay higher future taxes.

Question

Quizplus · Accepted Answer

The Ricardian equivalence theorem posits that consumers anticipate the need to pay off government deficits in the future through higher taxes, leading them to increase their savings now to prepare for those future tax increases. This offsets the direct impact of government spending on the economy, neutralizing the effect of deficits on the overall level of output.

According to the Ricardian Equivalence Theorem, Government Deficits Do Not