Ricardian Equivalence theory is based on the view that ________.

Question

Quizplus · Accepted Answer

The Ricardian Equivalence theory is based on the assumption that households take future events into account when making economic decisions, particularly with regards to taxation and government borrowing. According to this theory, if the government were to decrease taxes and increase borrowing to fund its spending, households would save more in anticipation of higher future tax rates needed to pay off the debt. Therefore, the theory suggests that tax cuts may not have the desired stimulative effect on the economy if households respond by saving more in anticipation of future tax increases.

Ricardian Equivalence Theory Is Based on the View That ________