Ricardian Equivalence: Difference between revisions
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The Ricardian Equivalence proposition suggests consumers internalise the government's budget deficit or surplus. Consequently, it does not matter whether a government finances its spending with debt or tax increases, the effect on the total level of demand in an economy is the same. | The '''Ricardian Equivalence''' proposition (formulated by [[David Ricardo]]) suggests consumers internalise the government's budget deficit or surplus. Consequently, it does not matter whether a government finances its spending with debt or tax increases, the effect on the total level of demand in an economy is the same. In simple terms, when a government incurs in a deficit to increase aggregate demand, consumers expect a raise in future taxes and save more, thus rendering the policy ineffective. | ||
In simple terms, when a government incurs in a deficit to increase aggregate demand, consumers expect a raise in future taxes and save more, thus rendering the policy ineffective. | |||
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Latest revision as of 09:44, 24 November 2010
The Ricardian Equivalence proposition (formulated by David Ricardo) suggests consumers internalise the government's budget deficit or surplus. Consequently, it does not matter whether a government finances its spending with debt or tax increases, the effect on the total level of demand in an economy is the same. In simple terms, when a government incurs in a deficit to increase aggregate demand, consumers expect a raise in future taxes and save more, thus rendering the policy ineffective.