Government reduces the current tax burden of households

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Suppose the government reduces the current tax burden of households today by sending a tax rebate by mail. Assume that the government pays for this tax rebate by borrowing today but will have to increase taxes in the future. What happens to desired private saving, desired public saving, desired national saving and desired consumption today in each of these scenarios? Assume that Y and G are fixed.

a. Consumers completely ignore that taxes will go up in the future.

b. Consumers perfectly anticipate that taxes will go up in the future.

c. Some consumers completely ignore that taxes will group in the future while the rest perfectly anticipate it.

d. In which of these scenarios (a,b or c?) does Ricardian Equivalence have the strongest chance of holding?

Reference no: EM131000926

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