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?© BrainMass Inc. brainmass.com October 9, 2019, 5:30 pm ad1c9bdddf
"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 ...
This solution discusses the effect of the tax cut in 173 words.