One hypothesis for the lack of success of the rapid fiscal expansion in Japan financed by increased borrowing in the 1990s to prevent a sharp economic downturn is:
A) Ricardian equivalence.
B) a large number of discouraged workers.
C) a sharply depreciated Japanese yen.
D) rising expected inflation.
E) high nominal interest rates.

Question

Quizplus · Accepted Answer

Ricardian equivalence predicts that an increase in government borrowing will be offset by increased private savings as individuals anticipate higher taxes in the future to pay off the debt. Therefore, increased government spending will not have a significant impact on aggregate demand and economic growth. This hypothesis may explain why Japan's rapid fiscal expansion did not produce the desired economic results.

One Hypothesis for the Lack of Success of the Rapid