According to the Ricardian equivalence theorem, an increase in government spending without any tax increase will not increase aggregate demand because
A) consumers will consume less and save more to prepare for increased taxes in the future.
B) the private sector is more likely than the public sector to spend any extra income on national defense.
C) consumers will increase their consumption proportionately more than Keynesian economists believe they will.
D) consumers will save less than they otherwise would have.

Question

Quizplus · Accepted Answer

The Ricardian equivalence theorem proposes that if the government increases spending without raising taxes, individuals will anticipate higher taxes in the future and will save more, offsetting any increase in demand created by government spending. This is because taxpayers recognize that they will eventually have to pay higher taxes to finance the additional government spending. Therefore, they will reduce their current consumption and save more in preparation for paying higher future taxes.

According to the Ricardian Equivalence Theorem, an Increase in Government