An implication of Ricardian equivalence is that if the government increases expenditures without increasing taxes, the increase in government expenditures will be:

Question

BlackTom AI · Accepted Answer

Ricardian equivalence states that forward-looking consumers treat government debt as future taxes, so a deficit-financed spending increase leads them to save more and reduce current consumption.

1. Relevant knowledge points and concepts
- Government budget constraint: higher current government spending financed by borrowing implies higher future taxes or lower future transfers (present value equality).
- Intertemporal household budget: lifetime consumption equals lifetime disposable income; rational consumers anticipate future tax liabilities and adjust saving/consumption accordingly.
- Implication: when the government increases expenditures without raising current taxes, consumers perceive an expected future tax increase and raise saving to pay it, reducing current consumption.

2. Step-by-step reasoning
- Suppose the government increases current spending by ΔG and issues bonds to finance it.
- The present-value of future taxes must rise by ΔG to satisfy the government’s intertemporal constraint (ignoring interest for simplicity).
- Households maximize lifetime utility subject to lifetime budget constraint: Σ C_t/(1+r)^t = Σ Y_t/(1+r)^t − PV(Taxes).
- If PV(Taxes) increases by ΔG, the right-hand side falls by ΔG, so the present value of lifetime consumption must fall by ΔG.
- Since lifetime consumption falls, current consumption falls unless households perfectly reallocate over time; in any case, part or all of the ΔG is offset by increased household saving.

3. Intermediate calculation (simplified)
Let PV(Y) be present value of income, PV(T) initial taxes. Lifetime consumption PV(C) = PV(Y) − PV(T). If ΔG financed by debt implies ΔPV(T) = ΔG, then ΔPV(C) = −ΔG. Thus households increase saving by ΔG (or reduce consumption by ΔG in PV terms).

4. Why the answer is correct
Because consumers internalize future tax liabilities from current borrowing, they reduce present consumption (increase saving), offsetting the stimulus effect of increased government spending.

5. Why other plausible options are incorrect
- "Consumer spending increases": contradicts the logic that future taxes reduce disposable lifetime resources.
- "No effect" would require consumers to be myopic or credit-constrained; that violates Ricardian assumptions.
- "Fully offset" can be true under strict assumptions (perfect foresight, infinite horizons), but Ricardian equivalence more generally implies at least a partial offset; real-world frictions may make it incomplete.

6. Conclusion
Therefore, the increase in government expenditures will be at least partially offset by a reduction in consumer spending, which matches the provided answer.

An implication of Ricardian equivalence is that if the government increases expenditures without increasing taxes, the increase in government expenditures will be:单项选择题

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