The stimulus strategy behind tax cuts will only be effective if Ricardian equivalence:
A) holds, and people increase their spending.
B) holds, and people save more.
C) fails to hold, and people increase their spending.
D) fails to hold, and people save more.

Question

Quizplus · Accepted Answer

Ricardian equivalence is the economic theory that suggests that people anticipate future taxes when making spending or saving decisions, therefore tax cuts may not stimulate spending because people expect the tax cuts to be offset by future tax increases. If Ricardian equivalence fails to hold and people do not anticipate future tax increases, they may increase their spending in response to tax cuts, making the stimulus strategy more effective. Therefore, the best choice is C.

The Stimulus Strategy Behind Tax Cuts Will Only Be Effective