One way to prove the Ricardian equivalence is true is to show that when the government deficit increases, (the) _______ also increase(s).

Question

Quizplus · Accepted Answer

Ricardian equivalence suggests that when the government increases its deficit spending, households will expect future taxes to rise to pay for the added debt, and thus will save by reducing their consumption expenditures. This leads to an increase in private sector saving, which offsets the increase in government borrowing and results in no net effect on aggregate demand. Therefore, as per the Ricardian equivalence, an increase in the government deficit would result in an increase in private sector saving.

One Way to Prove the Ricardian Equivalence Is True Is