Final answer:
The theoretical proposition in question is known as Ricardian equivalence, which implies that changes in government borrowing are offset by changes in private saving, neutralizing the impact on output. Option A is correct.
Step-by-step explanation:
The theoretical proposition that government deficits do not affect the level of output because individuals realize that they have to pay the deficits in the future and therefore increase their savings is known as Ricardian equivalence. It is represented by option A) the Ricardian equivalence theorem. The concept is named after the early nineteenth-century economist David Ricardo, who proposed that rational private households might shift their saving behaviors to offset government budget deficits or surpluses. According to this theory, any increase in government borrowing would be completely offset by an equal increase in private saving, which in theory would render government borrowing neutral in terms of its impact on physical capital investment or trade balances. However, empirical evidence suggests that Ricardian equivalence only holds true to a certain extent.