The proposition that an increase in the federal budget deficit caused entirely by a current tax cut has no effect on aggregate demand is called the
A) indirect effect.
B) interest rate effect.
C) open-economy effect.
D) Ricardian equivalence theorem.

Question

Quizplus · Accepted Answer

The proposition described in the question is known as the Ricardian equivalence theorem, which suggests that individuals may anticipate the tax cut eventually leading to future higher taxes to repay today's deficit. As a result, they save more today to offset the expected future tax burden, leading to no change in aggregate demand. The other choices, such as indirect effect, interest rate effect, and open-economy effect, refer to different concepts related to fiscal and monetary policies' impacts on the economy.

The Proposition That an Increase in the Federal Budget Deficit