The new classical model implies that a
A) budget surplus will effectively retard inflation emanating from excess demand.
B) budget deficit will increase the real interest rate.
C) substitution of debt for tax financing will leave aggregate demand and real output unchanged.
D) planned budget deficit will be a highly effective tool to combat a recession.

Question

Quizplus · Accepted Answer

The new classical model, particularly the Ricardian equivalence proposition, suggests that whether a government finances its spending through debt or taxes, it will not affect aggregate demand or real output because individuals anticipate future taxes to pay off the debt and adjust their savings accordingly.

The New Classical Model Implies That a