If the Ricardian equivalence proposition is correct, then an increase in the budget deficit will lead to:
A) a decrease in investment spending.
B) a lower standard of living in the future.
C) a decrease in private saving.
D) an increase in investment spending.
E) an increase in private saving.

Question

Quizplus · Accepted Answer

According to the Ricardian equivalence proposition, when the government increases its budget deficit, individuals anticipate future tax increases to pay off the debt. As a result, they increase their private saving to offset the expected future tax burden, leaving overall national saving unchanged.

If the Ricardian Equivalence Proposition Is Correct, Then an Increase