When consumers save their tax cut for a future tax increase,they are adhering to:
A) the bandwagon effect.
B) intertemporal substitution.
C) the multiplier effect.
D) Ricardian equivalence.

Question

Quizplus · Accepted Answer

This behavior, where consumers save their tax cut for a future tax increase, is known as Ricardian equivalence. It suggests that individuals will respond to a tax cut by saving an equivalent amount of money, as they expect that the government will have to eventually increase taxes to fund its spending. This theory is based on the assumption that people are forward-looking and have rational expectations about future policy changes.

When Consumers Save Their Tax Cut for a Future Tax