According to the theory of Ricardian equivalence, tax cuts combined with no plans to reduce government spending ______ public saving and ______ private saving.

Question

Quizplus · Accepted Answer

Ricardian equivalence suggests that when the government cuts taxes without reducing spending, individuals anticipate future taxes to pay off the government's debt. As a result, they increase their savings to prepare for these future taxes, leading to an increase in private saving. However, since the government is not reducing spending, its need for funds remains the same, leading to a reduction in public saving.

According to the Theory of Ricardian Equivalence, Tax Cuts Combined