The correct answer is: b)
The foundation of this model is the "Ricardian equivalence", which states that an expansionary fiscal policy is either possible by increasing taxes or by increasing the amount of borrowing. If this is so, then government borrowing is equivalent to increasing taxes. An illustration will help. If the government were to finance a spending increase by increasing taxes by an equivalent amount, there would be no impact on the economy. On the other hand, if this increase in spending were financed via debt today, then the government would have to find a way to pay this debt back in the future. This would most likely be achieved by increasing future taxes. Consequently, borrowing today will lead to higher taxes in the future. In response, individuals and businesses will begin saving more today so that they will have enough to pay higher taxes in the future. However, this increased private saving today will mute the effect of any spending that the government may embark upon. The result is that fiscal policy becomes ineffective in influencing the economy; although the government will now command a greater proportion of economic activity. Note that the simultaneous events of increased private savings and increased government borrowings will offset each other so that real interest rates remain unchanged. In summary then, the New Classical Model stipulates that fiscal policies will have no impact either on aggregate demand nor the real level of interest rates, certainly a statement that runs counter to Keynesian models.