The Ricardian Equivalence Theorem suggests that a budget

Solution

Solution: The Ricardian Equivalence Theorem posits that when the government cuts taxes and finances the resulting deficit by issuing debt, rational consumers anticipate that the debt will eventually have to be repaid through higher future taxes. Mechanism: Consumers view the tax cut as merely deferred taxation. They realize their total lifetime resources have not changed. They, therefore, save the entire tax cut to pay the future tax liability. Result: Private saving rises to exactly offset the drop in public saving (the deficit), leaving national saving and aggregate demand unchanged. This requires consumers to be fully rational and forward-looking (B) and to care about future generations (if the debt is rolled over). Option A describes a condition that violates Ricardian Equivalence.