According to the theory of Ricardian equivalence, if consumers are forward-looking, they will view a tax cut combined with no plans to reduce government spending as ______, so their consumption will ______.
A) additional disposable income; increase.
B) additional disposable income; remain unchanged.
C) a rescheduling of taxes into the future; increase.
D) a rescheduling of taxes into the future; remain unchanged.

Question

Quizplus · Accepted Answer

According to the theory of Ricardian equivalence, if consumers are forward-looking, they will view a tax cut combined with no plans to reduce government spending as a rescheduling of taxes into the future, as they will anticipate that taxes will eventually have to increase to pay for the current tax cut. Therefore, their consumption will remain unchanged, as they will save the additional disposable income from the tax cut in anticipation of future tax increases.

According to the Theory of Ricardian Equivalence, If Consumers Are