Suppose the public increase the level of savings in anticipation of higher future taxes to service the national debt. This is an example of
A) Reaganomics.
B) Smithsonian equivalence.
C) Ricardian equivalence.
D) Monetary equivalence.

Question

Quizplus · Accepted Answer

This situation is an example of Ricardian equivalence, which is the idea that when a government increases its borrowing, individuals will anticipate higher future taxes and therefore increase their savings in order to prepare for those taxes. This means that the increase in government borrowing may not actually stimulate the economy as much as intended, because individuals are offsetting the increase in government spending with their increase in savings. Reaganomics refers specifically to President Reagan's economic policies in the 1980s, and Smithsonian equivalence and monetary equivalence are not relevant to this situation.

Suppose the Public Increase the Level of Savings in Anticipation