Question

The Ricardian equivalence theorem states that

Answer 1

Answer: The Ricardian equivalence theorem states that : "A. an increase in the government budget deficit has no effect on aggregate demand."

Explanation: Ricardian Equivalence establishes that when the government increases the expenses financed with debt to try to stimulate the demand, this increase of the expenses does not produce any change in the demand.

This happens because the increases in the public deficit will be higher taxes in the future. Therefore, taxpayers reduce their consumption and increase their savings in order to offset the cost that will be the future tax increase.