Suppose the government cuts taxes by $300 million dollars this year and must pay off its debt next year by increasing taxes by $300 million.According to Ricardian equivalence,consumption spending will ________ this year and ________ next year,all else equal.

Question

Quizplus · Accepted Answer

According to Ricardian equivalence, taxpayers will recognize that the tax cut is just temporary, and so they will save the entire $300 million. With no change in consumption spending this year, there will be no need to decrease consumption spending by $300 million next year to pay off the debt, so consumption spending will not change next year either. Therefore, the correct answer is D.

Suppose the Government Cuts Taxes by $300 Million Dollars This