According to the Ricardian equivalence theory, what would happen if the government were to cut taxes without changing its spending?
A)Public and national saving would fall
B)Public and national saving would rise
C)Public and national saving would not change
D)Private saving would rise, public saving would fall, and national saving would be unaffected

Question

Quizplus · Accepted Answer

According to Ricardian equivalence, a tax cut without a change in government spending would lead individuals to save the extra income to pay for future tax increases, thus increasing private saving. Public saving would fall due to the tax cut, but national saving (the sum of private and public saving) would remain unchanged.

According to the Ricardian Equivalence Theory, What Would Happen If