According to the Ricardian equivalence theorem, budget deficits resulting from tax cuts
A) increase aggregate demand.
B) increase both aggregate demand and aggregate supply.
C) have no effect on aggregate demand.
D) affect only aggregate supply.

Question

Quizplus · Accepted Answer

The Ricardian equivalence theorem suggests that individuals anticipate future tax increases to pay for current tax cuts and therefore they may save their tax savings to pay for future tax increases. As a result, the increased government expenditure from the tax cuts is offset by private savings, leading to no net effect on aggregate demand. Therefore, the correct answer is C, there is no effect on aggregate demand.

According to the Ricardian Equivalence Theorem, Budget Deficits Resulting from Tax