Author Question: If taxes are reduced, will most people save more or less than before? Does national saving rise or ... (Read 57 times)

silviawilliams41 · **on:** Jun 30, 2018

If taxes are reduced, will most people save more or less than before? Does national saving rise or fall? Explain.

What will be an ideal response?

Question 2

In a two-period model, holding everything else constant, an increase in future taxes

A) unambiguously increases the current account surplus.
B) unambiguously decreases the current account surplus.
C) has an uncertain effect on the current account surplus.
D) has no effect on the current account surplus, as long as Ricardian equivalence holds.

macagnavarro · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Lower taxes mean higher disposable income, which should encourage increases in both consumption and saving. Reduced government revenue, given government spending, means a decrease in government saving. Since private saving does not rise as much as the decrease in government saving, national saving falls.

Answer to Question 2

D