Ricardian equivalence refers to the case where lower taxes today lead to higher:
A) government spending in the future.
B) taxes in the future.
C) aggregate demand in the future.
D) inflation in the future.

Question

Quizplus · Accepted Answer

Ricardian equivalence is the idea that when a government lowers taxes, individuals will understand that the government will likely have to increase taxes in the future to pay off the increased debt incurred from the tax cut. As a result, individuals will save the "extra" money from the tax cut in anticipation of future tax increases, offsetting any potential increase in aggregate demand or inflation. Therefore, lower taxes today will lead to higher taxes in the future, making choice B the correct answer.

Ricardian Equivalence Refers to the Case Where Lower Taxes Today