If the Ricardian equivalence proposition is correct, then:
A) deficits stimulate the economy in the short run.
B) deficits stimulate the economy in the medium run.
C) deficits have no effects on economic activity.
D) deficits harm future generations.
E) deficits reduce investment spending.

Question

Quizplus · Accepted Answer

The Ricardian equivalence proposition suggests that deficit spending does not stimulate economic activity because individuals will anticipate the future tax increases needed to pay for deficit spending and therefore the increased government spending will be offset by decreased private spending. This means that deficits have no significant effect on economic activity in the long run.

If the Ricardian Equivalence Proposition Is Correct, Then