If the time path of government purchases does not change and the government cuts current assets income taxes, then:
A)households save more and consume less in the present.
B)households save and consume less in the present.
C)households save less and consume more in the present.
D)households save and consume more in the present.

Question

Quizplus · Accepted Answer

If income taxes are cut and government purchases remain constant, households will have more disposable income in the present. However, since they expect their future tax burden to increase as a result of the government's increased borrowing to finance the deficit, households will tend to save more in the present and consume less. This phenomenon is known as Ricardian equivalence.

If the Time Path of Government Purchases Does Not Change