The argument that households and firms view an increase in government spending as a sign that taxes will rise in the future and decrease current spending in anticipation of higher future taxes is called:
A) debt overhang.
B) the natural rate hypothesis.
C) supply-side economics.
D) Ricardian equivalence.

Question

Quizplus · Accepted Answer

This argument is known as Ricardian equivalence, which suggests that individuals and firms will adjust their spending patterns based on their expectations of future taxes. They believe that an increase in government spending will eventually lead to higher taxes and therefore decrease current spending in anticipation of those future taxes.

The Argument That Households and Firms View an Increase in Government