If we lower taxes today but raise them in the future, and if $\beta$ = 1:
A) households' wealth rises because they save less
B) households will increase today's consumption
C) present wealth remains unchanged and consumption does not change
D) the government can rely on households to spend more today
E) saving today will fall and lifetime consumption rises

Question

Quizplus · Accepted Answer

When $\beta$ = 1, households are perfectly forward-looking and will anticipate future tax increases, offsetting any current tax cuts by saving more. Thus, present wealth and consumption remain unchanged.

If We Lower Taxes Today but Raise Them in the Future