Question

which is the best example of behavior predicted by the theory of ricardian equivalence?
a nation that focuses on the production of one good while trading for other goods and services.
an individual that increases consumption in response to a tax cut because she is able to keep a greater percentage of her income.
an individual that increases saving in response to a tax cut in anticipation of future tax increases.
a politician who suggests both tax cuts and increased government spending as expansionary fiscal policy.

Explanation:

The Ricardian equivalence theory suggests that individuals anticipate future tax changes when current taxes are cut. So, an individual would save more now (in response to a current tax cut) because they expect future taxes to increase (to pay for current government spending financed by the tax cut). Option A is about a nation's trade (not Ricardian equivalence). Option B is about consumption due to higher income percentage (not related). Option D is a politician's policy suggestion (not individual behavior as per the theory). Only Option C matches the theory: an individual increases saving now (tax cut) anticipating future tax increases.

Answer:

C. An individual that increases saving in response to a tax cut in anticipation of future tax increases.