The theory of Ricardian equivalence argues that expansionary fiscal policy:
A) will have no effect on the economy because consumers,anticipating higher taxes to pay for government spending,will decrease spending today to save for higher taxes.
B) is not effective because it causes higher interest rates and crowds out investment spending.
C) is effective,but contractionary fiscal policy is not.
D) is more effective than expansionary monetary policy.

Question

Quizplus · Accepted Answer

The theory of Ricardian equivalence proposes that consumers will anticipate higher taxes in the future to pay for government spending and will thus save more today to prepare for the expected tax increase. As a result, the increase in government spending from expansionary fiscal policy will have no effect on boosting consumer demand and the economy.

The Theory of Ricardian Equivalence Argues That Expansionary Fiscal Policy