According to the Ricardian equivalence theorem, budget deficits resulting from tax cuts
A) increase aggregate demand.
B)decrease aggregate demand.
C)have no effect on aggregate demand.
D)affect only aggregate supply.

Question

Quizplus · Accepted Answer

The Ricardian equivalence theorem proposes that individuals anticipate that tax cuts will eventually lead to future tax increases, causing them to save more in the present to offset the anticipated future tax burden. Therefore, the budget deficit resulting from tax cuts has no impact on aggregate demand.

According to the Ricardian Equivalence Theorem, Budget Deficits Resulting from Tax