Question

Explain whether or not you agree with the premise of the Ricardian equivalence theory that rational people might reason: “Well, a higher budget deficit (surplus) means that I’m just going to owe more (less) taxes in the future to pay off all that government borrowing, so I’ll start saving (spending) now.” Why or why not?

Short answer

Difficult to agree with the statement.

Step-by-step solution

Definition

Budget Deficit:

A budget deficit is described as a situation in which the government's revenues fall short of its expenses. Increased taxes, lower government expenditure, and increased economic growth can all help to reduce the government's budget deficit.

Explanation

Ricardian equivalence assumes economic agents to be completely rational and expects them to understand that any increase in deficit-financed government expenditure will eventually necessitate greater taxes to pay off the debt.

Explanation

Difficult to agree with the statement mentioned in the question because people do not have the insight to save for the future instead of spending now. It's possible that people won't be able to just save at this moment. They don't always have control over when and how much they save or spend. They may not be able to foresee whether present tax cuts may lead to future tax hikes..