Studies by economists suggest that
A)households do not increase their saving as the government's dissaving increases.
B)households increase their saving, but not by the full amount of an increase in government dissaving.
C)households also increase their dissaving when the government increases its dissaving.
D)households also increase their saving when the government increases its saving.

Question

Quizplus · Accepted Answer

Studies by economists suggest that households do increase their savings when the government increases its dissaving, but not by the full amount. It is commonly believed that households offset only a portion of the effect of government budget deficits on national saving. This is known as the "Ricardian equivalence" theory. According to this theory, households anticipate future tax increases that will be necessary to pay off government debt, and so they save more in anticipation of those future tax increases. However, they do not save enough to fully offset the increase in government dissaving.

Studies by Economists Suggest That