The effect on the equilibrium real GDP and Saving due to a lump sum tax cut of $750 billion Concept introduction: Ricardian Equivalence Theorem: The theorem suggests that tax cuts or increased spending by the government to stimulate the economy during a recession do not have any effect on aggregate demand. Aggregate demand remains unchanged because households expect higher taxes in future and hence, save more in the present. Lump-sum Tax: It is a tax of fixed amount that does not vary with the level of income.

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Chapter 13, Problem 14P

To determine

The effect on the equilibrium real GDP and Saving due to a lump sum tax cut of $750 billion

Concept introduction:

Ricardian Equivalence Theorem: The theorem suggests that tax cuts or increased spending by the government to stimulate the economy during a recession do not have any effect on aggregate demand. Aggregate demand remains unchanged because households expect higher taxes in future and hence, save more in the present.

Lump-sum Tax: It is a tax of fixed amount that does not vary with the level of income.

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