True or False?
The right answer is False. Tax cuts are ineffective under flexible exchange rates quite independently of Ricardian Equivalence considerations because equilibrium is determined by the intersection of LM and ZZ. The more interesting question is whether Ricardian Equivalence makes tax cuts ineffective under fixed exchange rates. Since tax cuts financed by new issues of government debt have no effect on wealth they can have no effect on consumption and hence cannot shift the IS curve. But this result is controversial as we shall see in the next topic. And tax cuts financed by printing money will nevertheless have some effect on output and employment in the fixed exchange rate case under less-than-full-employment conditions.