Ricardian equivalence argues that when the government cuts taxes and raises its deficit,

Question

Quizplus · Accepted Answer

Ricardian equivalence argues that consumers anticipate that the tax cut will be temporary and that it will be followed by a tax increase in the future to pay for the government debt. Therefore, they save the extra income from the tax cut instead of spending it, which reduces the effectiveness of the tax cut in stimulating the economy. Hence, consumers anticipate a future tax increase to pay for the resulting government debt.

Ricardian Equivalence Argues That When the Government Cuts Taxes and Raises