The theory that government borrowing may function like an increase in taxes is known as
A) the marginal propensity to consume.
B) the Ricardian equivalence theorem.
C) planned tax policy.
D) Congressional Tax policy.

Question

Quizplus · Accepted Answer

The theory that government borrowing may function like an increase in taxes is known as the Ricardian equivalence theorem. This theorem suggests that when the government seeks to stimulate the economy through deficit spending, individuals anticipate that future taxes will rise to pay off the debt, causing them to save more and spend less. As a result, the intended stimulus may not have the desired effect.

The Theory That Government Borrowing May Function Like an Increase