According to David Ricardo, during a high deficit situation taxation and borrowing are _______ means of spending.
Show answer & explanation
Correct answer: C
Explanation
The correct answer is option 3 i.e. Equivalent.
According to David Ricardo, during a high deficit situation, taxation and borrowing are equivalent means of spending. Ricardo's perspective, known as the Ricardo-Barro equivalence theorem, suggests that government borrowing today will lead to higher taxes in the future. As a result, the impact on the overall economy remains the same regardless of whether the government raises taxes or borrows money to finance its deficit. The theorem implies that the method of financing government spending does not affect the total economic burden.