The classical economists argued that budget deficits would not affect current spending. Suppose the federal government increases its purchases of goods and services by $100 billion this year. Classical economists who believe in the idea of Ricardian equivalence would argue that the increase in federal spending would have no effect on aggregate spending in the economy and no effect on private investment. Explain how a $100 billion increase in spending financed by a deficit can have no effect on the economy other than a reallocation of resources from private to government use.
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