If the government lowers taxes to stimulate the economy but then raises taxes in the future, according to the neoclassical consumption model, ________ because of ________.

Question

Quizplus · Accepted Answer

The neoclassical consumption model, incorporating Ricardian equivalence, suggests that if people anticipate future tax increases when taxes are cut today, they will save the tax cut to pay for future tax increases, leaving their consumption unchanged. This is because they perceive the present value of their wealth as unchanged, assuming they fully anticipate the future tax increase and adjust their savings accordingly to smooth consumption over time.

If the Government Lowers Taxes to Stimulate the Economy but Then