A lump-sum increase in current taxes would cause interest rates to
A)fall if Ricardian equivalence held.
B)fall if Ricardian equivalence did not hold.
C)fall regardless of whether Ricardian equivalence held.
D)rise.

Question

Quizplus · Accepted Answer

If Ricardian equivalence does not hold, consumers will reduce their consumption in response to a tax increase, leading to a decrease in demand for loanable funds, which can cause interest rates to fall.

A Lump-Sum Increase in Current Taxes Would Cause Interest Rates