An important reason why Ricardian equivalence may fail is if
A) borrowing and lending is done through intermediaries.
B) government debt incurred today may not be paid off until after some current consumers are deceased.
C) state and local governments also engage in debt finance.
D) some consumers are borrowers, while other consumers are lenders.
E) real interest rates start to increase.

Question

Quizplus · Accepted Answer

Ricardian equivalence assumes that consumers fully anticipate future tax increases necessary to pay off government debt, thus leading to no change in their consumption behavior. However, if government debt is not paid off until after some current consumers are deceased, those consumers may not fully anticipate the future tax burden and may increase their current consumption, leading to a violation of Ricardian equivalence.

An Important Reason Why Ricardian Equivalence May Fail Is If