Which of the following economic theories suggests that fiscal expansion financed by debt will fail to stimulate aggregate demand because individuals anticipate higher future taxes to pay off the debt?

💡 Solution & Explanation

The Ricardian Equivalence Theorem suggests that deficit-financed government spending does not affect aggregate demand because rational taxpayers increase savings to pay anticipated future tax liabilities. This macroeconomic hypothesis contrasts with traditional Keynesian multiplier views that rely on disposable income changes. Advanced economic concepts like this appear frequently in optional economics papers and specialized banking tests.