If Ricardian equivalence proposition is true,a budget deficit resulting from a tax cut will have
A)no effect on government expenditures.
B)no effect on current account because it does not affect national saving.
C)no effect on current account because people expect to pay lower taxes in the future.
D)no effect on current account because people expect to increase their consumption.

Question

Quizplus · Accepted Answer

According to the Ricardian equivalence proposition, when taxes are cut to finance a budget deficit, individuals anticipate that they will have to pay higher taxes in the future to eliminate the deficit. As a result, they save the tax cut, and the increase in saving offsets the increase in the budget deficit. Therefore, the budget deficit resulting from the tax cut will have no effect on national saving and, consequently, the current account balance.

If Ricardian Equivalence Proposition Is True,a Budget Deficit Resulting from a Tax