The new classical model states that a
A) budget surplus will effectively retard inflation that comes from excess demand.
B) budget deficit will have no impact on real interest rates.
C) budget deficit will increase the real interest rate.
D) substitution of debt for tax financing will increase aggregate demand and real output.

Question

Quizplus · Accepted Answer

The new classical model, particularly the Ricardian equivalence proposition, suggests that a budget deficit will not affect real interest rates because individuals anticipate future taxes to pay off the debt and adjust their savings accordingly.

The New Classical Model States That a