If the government cuts taxes today,issuing debt today and repaying the debt plus interest next year,a rational taxpayer will
A)spend the full amount of the tax cut today and reduce consumption next year.
B)increase consumption today, before taxes go up next year.
C)increase saving today, leaving consumption unchanged.
D)leave a smaller gross bequest to her or his heirs.

Question

Quizplus · Accepted Answer

Rational taxpayers, anticipating the need to repay the debt plus interest in the future, may increase their savings today to offset the future tax increase, thus leaving their consumption levels unchanged. This behavior aligns with the Ricardian equivalence theorem, which suggests that consumers will anticipate future taxes and adjust their savings accordingly, neutralizing the effect of current fiscal policies on consumption.

If the Government Cuts Taxes Today,issuing Debt Today and Repaying