According to Ricardian equivalence,the key consequence of an increase in the budget deficit that arises from a tax cut is ________.

Question

Quizplus · Accepted Answer

Ricardian equivalence posits that individuals perceive tax cuts as temporary, and therefore save the extra income to pay for future taxes. This means that government borrowing to finance the tax cut will be offset by increased private saving, rather than a decrease in private investment or an increase in inflation. As a result, the public is likely to hold more government bonds as savings rather than consume or invest the extra income. So, an increase in the public's holding of government bonds is the key consequence of an increase in the budget deficit arising from a tax cut, according to Ricardian equivalence.

According to Ricardian Equivalence,the Key Consequence of an Increase in the Budget