Ricardian equivalence occurs when:
A) the amount of tax increase is equivalent to the amount of private spending decrease.
B) a tax cut now is equivalent to a tax cut in the future.
C) people see that lower taxes today means higher taxes in the future.
D) the amount of tax cut is equivalent to the amount of government spending reduction.

Question

Quizplus · Accepted Answer

Ricardian equivalence is the theory that suggests that individuals will adjust their savings and spending behavior in response to changes in government fiscal policy. Specifically, it proposes that an increase in government debt (due to tax cuts or increased spending) will be offset by an increase in private savings, as individuals anticipate higher future taxes to pay for the debt. Therefore, option C is the correct choice as it describes the concept that people see that lower taxes today may mean higher taxes in the future, leading to their increased savings instead of spending. The other choices do not accurately describe Ricardian equivalence.

Ricardian Equivalence Occurs When