# If Ricardian equivalence holds true, what is the effect of a tax cut on equilibrium real GDP? On saving?

Suppose that Congress enacts a lump-sum tax cut of $750 billion. The marginal propensity to consume is equal to 0.75. If Ricardian equivalence holds true, what is the effect on equilibrium real GDP? On saving?

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"Ricardian equivalence" is the idea, suggested by David Ricardo, that raising government spending (or equivalently, cutting taxes) doesn't have any effect at all on aggregate demand; because taxpayers know that, while they have more money today, they will have to pay higher taxes in the ...

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This solution discusses the effect of the tax cut in 173 words.

$2.19