Ricardian Equivalence maintains that an increase in government spending financed by debt will result in a corresponding increase in
A) savings, in anticipation of future taxes.
B) output and consumption, stimulated by the additional government spending.
C) consumer spending, in anticipation of lower future taxes.
D) aggregate demand, because the additional spending was financed by borrowing rather than current taxation.

Question

Quizplus · Accepted Answer

According to Ricardian Equivalence, individuals anticipate that they will have to pay back the debt in the form of future taxes, so they increase their savings in order to pay those taxes. Therefore, an increase in government spending financed by debt will result in a corresponding increase in savings.

Ricardian Equivalence Maintains That an Increase in Government Spending Financed