Which theory states that a tax cut does NOT affect aggregate demand because people save all they gain from the tax cut?
A) quantity theory of money
B) inefficient market hypothesis
C) purchasing power parity
D) Ricardian equivalence

Question

Quizplus · Accepted Answer

Ricardian equivalence is the theory that people will save any extra income they receive, whether through government spending or tax cuts, expecting that the increased government debt will necessitate future tax hikes that offset the current tax cuts. Therefore, a tax cut would not affect aggregate demand because people would save all they gain from it.

Which Theory States That a Tax Cut Does NOT Affect