If Ricardian equivalence holds,then an expansionary fiscal policy will:
A) decrease aggregate demand in the short run.
B) increase aggregate demand in the short run,but not in the long run.
C) increase aggregate demand in both the short run and in the long run.
D) have no effect on aggregate demand either in the short run or in the long run.

Question

Quizplus · Accepted Answer

Ricardian equivalence theory suggests that individuals will save any increases in government spending or cuts to tax rates in order to pay for future tax liabilities. Therefore, an expansionary fiscal policy will have no effect on aggregate demand either in the short run or in the long run because any increase in government spending is offset by an increase in savings.

If Ricardian Equivalence Holds,then an Expansionary Fiscal Policy Will