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 income to remain constant and will hold spending constant
E) do not change their spending patterns

Question

Quizplus · Accepted Answer

According to Ricardian equivalence, when the government increases its expenditure without a proportional increase in taxes, households anticipate that they will have to pay more taxes in the future to finance current deficit spending. Therefore, they reduce their current consumption and save more to pay for higher taxes in the future. This is known as the Ricardian equivalence proposition, which suggests that changes in government spending have no effect on aggregate demand because any increase in government borrowing is offset by an increase in private saving.

According to Ricardian Equivalence, an Increase in Government Expenditure Without