A debt-financed tax cut will ______ saving in the traditional view and ______ saving in the view of Ricardian equivalence.

Question

Quizplus · Accepted Answer

In the traditional view, a debt-financed tax cut is believed to decrease saving because individuals have more disposable income to spend. According to Ricardian equivalence, individuals anticipate future taxes to pay off the debt and thus their saving behavior does not change; they save the tax cut to prepare for future tax increases.

A Debt-Financed Tax Cut Will ______ Saving in the Traditional