The Ricardian equivalence proposition states that an increase in the budget deficit causes:
A) consumption to increase.
B) consumption to decrease.
C) private saving to decrease.
D) output to increase.
E) private saving to increase.

Question

Quizplus · Accepted Answer

Ricardian equivalence suggests that when the government increases its budget deficit, individuals anticipate future taxes to pay off the debt, so they increase their private saving to offset the expected future tax burden, leaving consumption unchanged.

The Ricardian Equivalence Proposition States That an Increase in the Budget