According to Ricardian equivalence, an increase in government expenditure without a proportional tax increase implies that households:
A) expect future tax increases and will reduce spending today.
B) expect higher current income and will increase spending today.
C) expect future tax decreases and will reduce spending today.
D) expect their incomes to remain constant and will hold spending constant.
E) do not change their spending patterns.

Question

Quizplus · Accepted Answer

According to Ricardian equivalence, households anticipate that any increase in government spending will ultimately be financed by taxes in the future. Therefore, if there is an increase in government expenditure without a proportional tax increase, households will expect future tax increases and will reduce their spending today to save for those future taxes.

According to Ricardian Equivalence, an Increase in Government Expenditure Without