Ricardian equivalence will fail to hold if:
A) consumers increase their spending when they receive a tax rebate check.
B) consumers save the money they receive from a tax rebate check.
C) the intended expansionary effects of tax policy do not occur.
D) None of these are true.

Question

Quizplus · Accepted Answer

Ricardian equivalence states that individuals save any extra income they receive, including tax rebates, because they expect future taxes to rise to pay for any current tax cuts. If consumers increase their spending when they receive a tax rebate check, it contradicts the theory of Ricardian equivalence. Therefore, choice A is correct. B is incorrect because it is expected under Ricardian equivalence. C is not necessarily true or false and does not relate to the concept of Ricardian equivalence.

Ricardian Equivalence Will Fail to Hold If