The Ricardian equivalence proposition will not hold if
A)the government finances its expenditures by borrowing rather than by taxing.
B)the government finances its expenditures by taxing rather than by borrowing.
C)consumers face restrictions on the amount they can borrow.
D)consumers finance their tax payments by borrowing.

Question

Quizplus · Accepted Answer

The Ricardian equivalence proposition states that a government's method of financing its expenditures has no impact on aggregate demand, as households will adjust their consumption and saving behavior based on expectations of future taxes. However, if consumers face restrictions on the amount they can borrow, they may not be able to adjust their consumption behavior in response to future taxes, leading to the breakdown of the Ricardian equivalence proposition.

The Ricardian Equivalence Proposition Will Not Hold If