According to the Ricardian equivalence theorem, government deficits do not affect output because people:
A)save more when government deficits decrease.
B)save more when government deficits increase.
C)consume more when government deficits increase.
D)do not change consumption nor savings.

Question

Quizplus · Accepted Answer

According to the Ricardian equivalence theorem, individuals anticipate that government deficits today will lead to increased taxes in the future. As a result, they save more in anticipation of these future taxes, offsetting the impact of current government spending on the economy. This behavior suggests that government deficits do not affect the overall level of output because any increase in government spending is matched by an increase in private savings.

According to the Ricardian Equivalence Theorem, Government Deficits Do Not