According to Ricardian equivalence, when the government borrows today and consumers expect higher taxes in future to repay the debt, consumers will:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → save more now, so that national savings do not change
Under Ricardian equivalence, consumers look ahead. They know that borrowing today means higher taxes later, so they save more now. Their extra saving offsets the government’s dissaving, and national savings stay the same.
Spending more now is the older view, that people are short-sighted and do not see the future taxes.
NCERT (2026-27): “Perspectives on the Appropriate Amount of Government Debt: … A counter argument is that consumers are forward-looking and will base their spending not only on their current income but also on their expected future income. They will understand that borrowing today means higher taxes in the future. Further, the consumer will be concerned about future generations because they are the children and grandchildren of the present generation and the family which is the relevant decision making unit, continues living. They would increase savings now, which will fully offset the increased government dissaving so that national savings do not change. This view is called Ricardian equivalence after one of the greatest nineteenth century economists, David Ricardo, who first argued that in the face of high deficits, people save more. …” |