A key assumption of Ricardian equivalence is:
A) the permanent-income hypothesis.
B) the life-cycle hypothesis.
C) adaptive expectations.
D) independent monetary policy.
E) None of these answers is correct.

Question

Quizplus · Accepted Answer

Ricardian equivalence is based on the assumption of the permanent-income hypothesis, which suggests that individuals base their current consumption decisions not just on current income but on their expected future income as well. This means that if the government were to increase public spending and finance it through debt, individuals would anticipate future tax increases to repay the debt, leading them to save more and consume less in the present. This would offset any short-term increase in aggregate demand and have little effect on the economy in the long run.

A Key Assumption of Ricardian Equivalence Is