The Ricardian equivalence theorem states that

A. an increase in the government budget deficit has no effect on aggregate demand.

B. tax decreases and government spending increases have equivalent effects on aggregate demand.

C. increase in tax rates will reduce work effort, and thus there will be no effect on output or aggregate demand.

D. direct and indirect crowding out has the same effect on aggregate demand.

Question

Scarlett Richard

Business

29 December, 15:36

The Ricardian equivalence theorem states that

A. an increase in the government budget deficit has no effect on aggregate demand.

B. tax decreases and government spending increases have equivalent effects on aggregate demand.

C. increase in tax rates will reduce work effort, and thus there will be no effect on output or aggregate demand.

D. direct and indirect crowding out has the same effect on aggregate demand.

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Answers (1)

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Kadin Gallagher · Answer 1

Answer: The Ricardian equivalence theorem states that : "A. an increase in the government budget deficit has no effect on aggregate demand."

Explanation: Ricardian Equivalence establishes that when the government increases the expenses financed with debt to try to stimulate the demand, this increase of the expenses does not produce any change in the demand.

This happens because the increases in the public deficit will be higher taxes in the future. Therefore, taxpayers reduce their consumption and increase their savings in order to offset the cost that will be the future tax increase.