In response to a tax cut, the consumption of a consumer who is borrowing-constrained ______, whereas the consumption of a forward-looking, unconstrained consumer acting in accord with Ricardian equivalence ______.

Question

Quizplus · Accepted Answer

A borrowing-constrained consumer is likely to increase consumption in response to a tax cut due to immediate additional disposable income. A forward-looking, unconstrained consumer, under the Ricardian equivalence, would perceive the tax cut as a future tax liability increase and thus, would not change their consumption, as they understand that current government savings will have to be paid back in the future.

In Response to a Tax Cut, the Consumption of a Consumer