The theory that government borrowing may function like an increase in taxes, that is, reducing current consumption and business expenditures, is known as
A)the marginal propensity to consume.
B)the Ricardian equivalence theorem.
C)planned tax policy.
D)Congressional Tax policy.

Question

Quizplus · Accepted Answer

The theory that government borrowing may function like an increase in taxes, that is, reducing current consumption and business expenditures, is known as the Ricardian equivalence theorem. This theory suggests that when the government borrows, individuals recognize that they will have to pay higher taxes in the future to pay off the debt, so they may choose to save their current income instead of spending it, leading to a reduction in current consumption and business expenditures.

The Theory That Government Borrowing May Function Like an Increase