Question

which is the best characterization of the theory of ricardian equivalence?
○ fiscal policy and monetary policy both have the potential to influence aggregate demand.
○ fiscal policy can achieve equivalent results through changes to either taxation or government spending practices.
○ people change their consumption and saving decisions in response to budget deficits or surpluses.
○ trade between two nations is mutually beneficial if each nation specializes in goods and services for which they have a comparative advantage.

Explanation:

The Ricardian equivalence theory posits that people adjust their consumption and saving based on government budget deficits or surpluses (since they anticipate future tax changes to offset current fiscal actions). The first option is about fiscal and monetary policy influencing aggregate demand (not Ricardian equivalence). The third option is about comparative advantage in trade (Ricardo's comparative advantage, not equivalence). The fourth option is about trade benefits from specialization (also comparative advantage). So the correct characterization is that people change consumption/saving in response to budget deficits/surpluses.

Answer:

People change their consumption and saving decisions in response to budget deficits or surpluses.