New Classical View and Deficits: The Relationship Explained

The Impact of New Classical View on Deficits

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According to the New Classical View, ________ is unaffected by deficits since people will save more money in order to pay the higher future taxes.

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A

New classical economies stress that debt financing merely affects the timing of taxes, not their magnitude. Debt financing substitutes higher future taxes for lower current taxes. As a result, households reduce their current consumption in response to additional government debt as surely as would be the case if an equivalent amount of current taxes were levied.

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