-Refer to the above figure. Suppose the economy is at E and the government uses an expansionary fiscal policy to move the aggregate demand curve to AD2. In the end, the aggregate demand curve is still AD1. A possible reason for this is that

Question

Quizplus · Accepted Answer

C) is correct because it describes the Ricardian equivalence theory, where people anticipate future tax increases due to current government spending and save more to pay for future taxes, offsetting the effect of the government's expansionary fiscal policy.

-Refer to the Above Figure