What will ricardian citizens do with the extra money

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Question: Imagine you live in the land of Ricardia, where every citizen is a Ricardian and thus "Ricardian equivalence" is 100% true. Government spending never changes in Ricardia: It's a fixed amount every year. Thus, when the Ricardian government cuts taxes, it has to pay for the government spending by borrowing more money and raising future taxes to repay the debt.

a. When Ricardian income taxes are cut, what will Ricardian citizens do with the extra money in their paycheck: Will they spend all of it, save all of it, or spend some and save the rest?

b. Suppose that instead of a tax cut, the Ricardian government just sends citizens "rebate" checks. What will Ricardian citizens do with the extra money from these rebate checks: Will they spend all of it, save all of it, or spend some and save the rest?

Reference no: EM131834708

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