Which of the following conditions would lead to the failure of Ricardian Equivalence?

Ricardian Equivalence holds only under a set of strong assumptions: (i) households are rational and forward-looking, with infinite horizons or with altruistic links to their heirs, (ii) capital markets are perfect, so that households can borrow and lend freely at the same interest rate, (iii) taxes are lump-sum and non-distortionary, and (iv) there is no uncertainty about future taxes and incomes. Options (A), (B), (C) and (E) are exactly these assumptions. When they hold, equivalence holds, so they cannot be the cause of its failure. Option (D) is the correct answer. A liquidity-constrained household is unable to borrow against its future income, so it would like to consume more today than its current income permits. When the government cuts taxes, the household spends the additional disposable income instead of saving it. Consumption and aggregate demand rise, and Ricardian Equivalence fails. Hence the correct option is (D).