Which of the following correctly explain Ricardian equivalence?
A)Government spending that is financed by borrowing has a smaller effect on the economy than government spending financed by raising taxes.
B)Consumers do not base current spending on future expected tax liabilities.
C)Government borrowing can function like increased current taxes, reducing current household and business expenditures.
D)The government should balance its budget by equating revenue and expenditure in every fiscal year.
E)Government spending does not crowd out private investment.

Question

Quizplus · Accepted Answer

Ricardian equivalence suggests that when the government carries out deficit financing, households expect future taxes to increase to pay off the debt, so they reduce their current consumption in anticipation of the future tax. Therefore, government borrowing can function like increased current taxes, reducing current household and business expenditures.

Which of the Following Correctly Explain Ricardian Equivalence