The argument that an increase in aggregate demand, as a result of an increase in government purchases, will be offset by increases in savings (less current consumer spending) for future taxes is called:
A)the crowding out effect
B)the Ricardian equivalence theorem
C)the budget deficit effect
D)the budget surplus effect

Question

The argument that an increase in aggregate demand, as a result of an increase in government purchases, will be offset by increases in savings (less current consumer spending) for future taxes is called:
A)​the crowding out effect
B)​the Ricardian equivalence theorem
C)​the budget deficit effect
D)​the budget surplus effect

Quizplus · Accepted Answer

The argument described in the question refers to the Ricardian equivalence theorem, which suggests that consumers may anticipate future taxes to pay for any increase in government spending, leading to higher savings and lower current consumption. This can offset the expansionary effect of government purchases on aggregate demand. The other options, such as the crowding out effect or the budget deficit/surplus effects, have different implications for the relationship between government spending and the economy.

The Argument That an Increase in Aggregate Demand, as a Result