If an economy is in a recession and the government opts for an expansionary fiscal policy to shift the AD curve closer to the potential output, a sound finance economist with a Classical view, who holds the Ricardian equivalence theorem to be practically true, would conclude that the AD curve:

Question

Quizplus · Accepted Answer

A sound finance economist with a Classical view, who believes in the Ricardian equivalence theorem, would argue that any increase in government spending (financed through borrowing) would lead to an equivalent increase in private savings to pay for future tax liabilities. This means that the increase in government spending is offset by a decrease in private consumption, leaving the aggregate demand (AD) curve unchanged.

If an Economy Is in a Recession and the Government