To the extent that the Ricardian equivalence theorem is true, which of the conditions below will hold?
A)Increases in the government budget deficit will not affect aggregate demand.
B)Exports will not be considered part of aggregate demand.
C)Investment spending will not be considered part of aggregate demand.
D)The long-run aggregate supply curve will not be vertical.

Question

Quizplus · Accepted Answer

According to the Ricardian equivalence theorem, consumers will save more in anticipation of future tax increases to pay for government deficits. Therefore, any increase in the government budget deficit will be offset by an equal decrease in private consumption, resulting in no net change in aggregate demand.

To the Extent That the Ricardian Equivalence Theorem Is True