According to the Ricardo-Barro effect
A) government deficits raise the real interest rate.
B) taxpayers fail to foresee that government deficits imply higher future taxes.
C) households increase their personal saving when governments run budget deficits.
D) government budget deficits increase households' expected future disposable income.

Question

Quizplus · Accepted Answer

The Ricardo-Barro effect, also known as Ricardian equivalence, posits that when a government increases its borrowing to finance a deficit, rational consumers anticipate future tax increases to repay the debt. As a result, they increase their savings to pay for these future taxes, neutralizing the effect of the government's deficit spending on the overall economy.

According to the Ricardo-Barro Effect