The Theory of Ricardian Equivalence Argues That Expansionary Fiscal Policy

question 95

Multiple Choice

The theory of Ricardian equivalence argues that expansionary fiscal policy:

• A) will have no effect on the economy because consumers, anticipating higher taxes to pay for government spending, will decrease spending today to save for the higher taxes.
• B) is not effective because it causes higher interest rates and crowds out investment spending.
• C) is effective, but contractionary fiscal policy is not.
• D) is more effective than expansionary monetary policy.

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