Which of the following is a basic assumption of the Ricardian equivalence theorem?
A)Consumers pay no attention to government budget deficits.
B)Consumers think only in terms of the present.
C)If current tax cuts result in budget deficit increases, aggregate supply falls.
D)Consumers consider future tax payments when deciding how much to spend and save today.

Question

Quizplus · Accepted Answer

The Ricardian equivalence theorem assumes that consumers consider future tax payments when deciding how much to spend and save today. This means that any increase in government spending or reduction in taxes will be offset by an increase in private saving, as consumers anticipate that taxes will have to be increased in the future to pay for the deficit. Choice A, B, and C are all incorrect because they do not represent the assumption of the Ricardian equivalence theorem.

Which of the Following Is a Basic Assumption of the Ricardian