If Ricardian equivalence holds,then a $100 million tax cut financed by issuing government bonds means that:
A) private saving will increase by $100 million.
B) consumption will increase by $100 million.
C) government spending will increase by $100 million.
D) aggregate demand will increase by $100 million.

Question

Quizplus · Accepted Answer

Ricardian equivalence suggests that when the government cuts taxes and finances this cut by issuing bonds, individuals will anticipate future taxes to pay off these bonds. Therefore, they increase their savings by the amount of the tax cut to prepare for future tax increases, leading to no change in consumption or aggregate demand.

If Ricardian Equivalence Holds,then a $100 Million Tax Cut Financed