If households expect that the expenditure programs are temporary and that there will be tax-increases in future to cover the deficits, expansionary fiscal policy may not stimulate aggregate spending.

Question

Quizplus · Accepted Answer

This is because of the Ricardian equivalence theorem, which suggests that consumers might save any increase in disposable income from tax cuts or increased government spending if they anticipate future taxes to pay for the government's current spending, thus neutralizing the intended stimulative effect of the expansionary fiscal policy.

If Households Expect That the Expenditure Programs Are Temporary and That