Ricardian equivalence is an economic theory that says that financing government spending out of current taxes or future taxes (and current deficits) will have equivalent effects on the overall economy .
What does the concept of rationality have to do with Ricardian equivalence?
What does the concept of rationality have to do with Ricardian equivalence? Ricardian equivalence assumes that economic agents are perfectly rational in the sense that they will realize that any increase in deficit-financed government spending will ultimately require higher taxes to repay the debt.
What is the theory of Ricardian equivalence quizlet?
Ricardian Equivalence Theorem. a theorem proposing that an increase in the government budget deficit has no effect on aggregate demand . Fiscal Policy . the discretionary changing of government expenditures or taxes in order to achieve national economic goals .
Which is the best characterization of the theory of Ricardian equivalence?
Best Characterization of the theory of Ricardian equivalence? People change their consumption and saving decisions in response to budget deficits or surpluses .
Who named Ricardian equivalence?
Named by Robert Barro of Harvard University (its main proponent) after 19th century economist David Ricardo , the theory of Ricardian equivalence claims that people will tend to save rather than consume the extra income arising from such spending.
What flaw in the theory of Ricardian equivalence does the information in this graph highlight?
What flaw in the theory of Ricardian equivalence does the information in this graph highlight? Private households and firms do not have information about the government budget . Over time, governments will increase their budget deficits, not decrease them.
When countries have severe debt problems?
When countries have severe debt problems: expansionary fiscal policy can reduce real growth . Fiscal policy is: less effective in dealing with real shocks than with aggregate demand shocks.
Why is Ricardian equivalence important?
Ricardian equivalence maintains that government deficit spending is equivalent to spending out of current taxes . Because taxpayers will save to pay the expected future taxes, this will tend to offset the macroeconomic effects of increased government spending.
What is the formula for national savings?
The national savings rate is the GDP that is saved rather than spent in an economy. It is calculated as the difference between a nation’s income and consumption divided by income.
How government borrowing can affect private saving?
A variety of statistical studies based on the U.S. experience suggests that when government borrowing increases by $1 , private saving rises by about 30 cents.
What is Ricardian model What are the assumptions of Ricardian model?
The modern version of the Ricardian model assumes that there are two countries producing two goods using one factor of production, usually labor . ... The goods produced are assumed to be homogeneous across countries and firms within an industry.
Which describes the role of automatic stabilizers in the economy?
Automatic stabilizers are features of the tax and transfer systems that temper the economy when it overheats and stimulate the economy when it slumps, without direct intervention by policymakers. Automatic stabilizers offset fluctuations in economic activity without direct intervention by policymakers.
What are automatic stabilizers examples?
The best-known automatic stabilizers are progressively graduated corporate and personal income taxes, and transfer systems such as unemployment insurance and welfare . Automatic stabilizers are called this because they act to stabilize economic cycles and are automatically triggered without additional government action.
What does Ricardian mean?
: of or relating to the English political economist Ricardo or to his theory of rent as an economic surplus .
What is Ricardian theory of international trade?
Ricardo (1817) suggested that countries specializing in the production of the commodities in which they have a comparative advantage, can achieve higher standards of consumption and living by trading these goods with other countries . Indeed, international trade has been rising steadily over the past decades.
What is twin deficit problem?
The twin deficit, or double deficit, occurs when a nation has both a current account deficit and a budget deficit . This means the country’s economy is importing more than it is exporting, and the country’s government is spending more money than it is generating.
