According to the Ricardian Equivalence Theorem, a Tax Cut That

question 246

Multiple Choice

According to the Ricardian equivalence theorem, a tax cut that increases the government budget deficit will have

• A) no effect on aggregate demand because people realize that there will be a future tax liability so that there is no increase in consumption expenditures.
• B) no effect on aggregate demand because people only look at changes in taxes or government spending in the present.
• C) a positive effect on aggregate demand because people look at changes in taxes or government spending in the present.
• D) an effect on aggregate demand. The magnitude the effect will have depends upon whether the increase is caused by a reduction in taxes or an increase in government spending.

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