Assuming that the Ricardian equivalence theorem is TRUE, which of the conditions below will hold?
A) An increase in the government budget deficit will not affect aggregate demand.
B) Exports will not be considered part of aggregate demand.
C) Investment spending will not be considered part of aggregate demand.
D) The long-run aggregate supply curve will not be vertical.

Question

Quizplus · Accepted Answer

According to the Ricardian equivalence theorem, an increase in the government budget deficit will not affect aggregate demand because individuals will adjust their consumption and savings behavior in anticipation of future taxes. Therefore, the answer is A.

B) This is not a relevant condition related to the Ricardian equivalence theorem.
C) Investment spending is still considered part of aggregate demand according to the Ricardian equivalence theorem.
D) The long-run aggregate supply curve can still be vertical or horizontal regardless of the Ricardian equivalence theorem.

Assuming That the Ricardian Equivalence Theorem Is TRUE, Which of the Conditions