According to the Ricardian equivalence theorem, people increase savings when the government increases deficits because they recognize the link between government deficits and higher future taxes.

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The Ricardian equivalence theorem posits that consumers anticipate that higher government deficits today will lead to higher taxes in the future to pay off the debt, and thus, they increase their savings to prepare for this future tax burden.

According to the Ricardian Equivalence Theorem, People Increase Savings When