If an economy is above potential output and the government opts for a contractionary fiscal policy (running surpluses)to shift the AD curve, an economist with a Classical view, who holds the Ricardian equivalence theorem to be practically true, would conclude that the AD curve:
A)shifts to the right due to lower government spending.
B)shifts to the left due to lower government spending.
C)does not shift since the lower government spending is offset by higher private consumption.
D)does not shift since the lower government spending is offset by lower private consumption.

Question

Quizplus · Accepted Answer

The Ricardian equivalence theorem posits that consumers anticipate future taxes that will pay for current government spending. Therefore, if the government reduces its spending and runs surpluses, consumers expect lower future taxes and increase their current consumption, offsetting the decrease in government spending. This means the aggregate demand (AD) curve does not shift.

If an Economy Is Above Potential Output and the Government