The Ricardian equivalence theorem suggests that an increase in the government budget deficit created by a tax cut will
A)increase real Gross Domestic Product (GDP)in both the short and long run.
B)decrease real Gross Domestic Product (GDP)in both the short and long run.
C)decrease real Gross Domestic Product (GDP)in the short run, but increase it in the long run.
D)have no effect on aggregate demand.

Question

Quizplus · Accepted Answer

The Ricardian equivalence theorem posits that consumers anticipate future taxes to pay off government debt, so they save any tax cuts, leaving aggregate demand unchanged.

The Ricardian Equivalence Theorem Suggests That an Increase in the Government