According to the new classical view, budget deficits will
A) cause real interest rates to rise, which will decrease aggregate demand, output, and employment.
B) lead to an expansion in spending, which will stimulate both real output and employment.
C) fail to stimulate aggregate demand because people will save more in order to pay the higher future taxes implied by the expansion in government debt.
D) lead to inflation because the deficits expand the money supply.

Question

Quizplus · Accepted Answer

The new classical view, particularly the Ricardian equivalence proposition, suggests that budget deficits do not affect aggregate demand because people anticipate future taxes to pay off the debt and therefore increase their savings.

According to the New Classical View, Budget Deficits Will