Ricardian equivalence:
A) is the decrease in private spending that occurs when government increases spending.
B) occurs when people see that lower taxes today means higher taxes in the future,so instead of spending their tax cut they save it to pay future taxes.
C) is federal government policy on taxes,spending,and borrowing that is designed to influence business fluctuations.
D) is central bank policy on the monetary base,interest rates,and bank reserves that is designed to influence business fluctuations.

Question

Quizplus · Accepted Answer

Ricardian equivalence is the idea that a government budget deficit financed by borrowing will have no impact on aggregate demand since individuals seeing the increase in government borrowing will reduce their personal savings to prepare for expected future tax increases to pay for the deficit. Therefore, this reduces the effectiveness of fiscal policy. As a result, choice (B) is the correct one, as it describes this phenomenon.

Ricardian Equivalence