If government spending is held constant and Ricardian equivalence holds
A)an increase in the government budget deficit is always matched by a reduction in private savings.
B)an increase in government savings is always matched by an equal increase in private savings.
C)an increase in government savings is always matched by an increase in the government budget deficit.
D)an increase in government savings is always matched by an increase in the real interest rate.
E)an increase in government savings is always matched by an equal reduction in private savings.

Question

Quizplus · Accepted Answer

Ricardian equivalence suggests that individuals will anticipate any increase in government debt or deficit and adjust their savings accordingly. If government spending is held constant, an increase in government savings (i.e. surplus) means that the government is borrowing less from the private sector, hence private savings must decrease (i.e. reduction in private savings) to offset the increase in government savings. Therefore, an increase in government savings is always matched by an equal reduction in private savings.

If Government Spending Is Held Constant and Ricardian Equivalence Holds