The Ricardian Equivalence Theorem implies that a change in the timing of taxes
A)has a positive effect on both consumption and the real interest rate.
B)affects consumption negatively and the real interest rate positively.
C)has a negative effect on both consumption and the real interest rate.
D)affects consumption positively and the real interest rate negatively.
E)has no effect on consumption or the real interest rate.

Question

Quizplus · Accepted Answer

The Ricardian Equivalence Theorem suggests that consumers are forward-looking and thus, a change in the timing of taxes (e.g., a tax cut today financed by an increase in taxes in the future) does not affect their consumption or the real interest rate. This is because consumers anticipate the future tax liabilities and save the tax cut to pay for future taxes, leaving consumption and the real interest rate unchanged.

The Ricardian Equivalence Theorem Implies That a Change in the Timing