Under the standard Ricardian Equivalence proposition (Barro, 1974), a tax cut financed by government bond issuance results in:

The Ricardian Equivalence proposition states that, for a given level of government expenditure, it makes no difference whether the government finances it by taxes today or by borrowing (which means taxes in the future). Suppose the government cuts taxes by T today and finances the cut by issuing bonds. The bonds have to be repaid with interest, so future taxes must rise by T(1 + r), whose present value is exactly T. A rational, forward-looking household realises that its lifetime resources have not changed: what it gains today it will lose later through higher taxes. It therefore saves the entire tax cut in order to pay the future taxes, and its consumption remains the same. The effect on saving is: Public saving falls by T (the budget deficit rises by T) Private saving rises by T National saving = private saving + public saving, which is unchanged. Consumption, the interest rate and aggregate demand are therefore all unaffected. Option (A) is the conventional Keynesian result, where households spend the tax cut and demand rises. Option (B) is self-contradictory: in the Keynesian view the extra consumption lowers national saving, it does not raise it. Options (D) and (E) have no basis in the proposition. Hence the correct option is (C).