If the government reduces taxes by €1 this year without raising taxes or printing more money, then
A)future tax liabilities will rise by €1 plus the interest, R, that must be paid on the borrowing.
B)future tax liabilities will rise by €1 less the interest, R, that must be paid on the borrowing.
C)future tax liabilities will fall by €1 plus the interest, R, that must be paid on the borrowing.
D)future tax liabilities will fall by €1 less the interest, R, that must be paid on the borrowing.

Question

Quizplus · Accepted Answer

Reducing taxes by €1 without raising taxes or printing more money implies the government will have to borrow to cover the shortfall. This borrowing will incur interest, so future tax liabilities will increase by the borrowed amount (€1) plus the interest that must be paid on this borrowing.

If the Government Reduces Taxes by €1 This Year Without