The idea that government budget deficits do not matter under certain circumstances is
A) called the Friedman-Lucas theory.
B) called the Ricardian equivalence theorem.
C) attributed to Edward Prescott and Finn Kydland.
D) preposterous.

Question

Quizplus · Accepted Answer

The idea that government budget deficits do not matter under certain circumstances is called the Ricardian equivalence theorem. It argues that individuals anticipate future tax increases to pay off the debt, so they increase their savings to offset future tax liabilities. This means that deficit spending today will not stimulate the economy, as consumer spending will not increase since people are saving more. Therefore, the deficit will have no impact on overall economic growth.

The Idea That Government Budget Deficits Do Not Matter Under