Ricardian equivalence refers to
A) the equivalence of taxes and revenues in fiscal policy.
B) the fact the households incorporate inflationary expectations in calculating interest payments.
C) the equivalence of imports and exports in an open economy.
D) the possibility that households may say save now so that they can pay the higher taxes later if there is a tax cut at the present time which drives up future interest payments.
E) none of the above.

Question

Quizplus · Accepted Answer

Ricardian equivalence suggests that households may save now so that they can pay the higher taxes later if there is a tax cut at the present time which drives up future interest payments. This is based on the assumption that households are forward-looking and understand that a tax cut today means higher taxes in the future, so they may adjust their behavior accordingly. This argument suggests that tax cuts may not have the same stimulative effect on the economy as expected, as households may save the extra income rather than spend it.

Ricardian Equivalence Refers to