The New Classical Model Implies That Substitution of Debt for Tax

question 60

Multiple Choice

The new classical model implies that substitution of debt for tax financing

• A) increases aggregate demand and exerts an expansionary effect on real output.
• B) is highly effective against inflation.
• C) reduces savings because it increases both the current and future tax liability of households.
• D) leaves wealth, and therefore aggregate demand, unchanged because the debt will require higher future tax rates.

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