ryy
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The Ricardian Equivalence Theorem states that

A. the method of financing government expenditures is irrelevant for the effects of these expenditures

D. an increase in government expenditures financed by a combination of taxation and borrowing has no effect on the economy

Is it A or D?
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ddrrzzeerr
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A.
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cole-slaw
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Ricardian equivalence assumes that the public are smart enough to figure out that if you increase spending by increasing borrowing, you're going to have to increase taxes in the future, so out of caution they start saving for that eventuality and act as if taxes were already higher.

Its basically *******s. People are not that smart and not that longsighted. But yes the answer is A.
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MagicNMedicine
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It will be D because Ricardian equivalence would say an increase in government spending financed by taxation and borrowing would have no stimulus effect because individuals are forward looking and would expect any increase in borrowing to be matched with higher taxes later so to smooth their consumption individuals save now in anticipation of the higher future taxes.

It is just a theoretical idea, based on some rather big assumptions.
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cole-slaw
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(Original post by MagicNMedicine)
It will be D because Ricardian equivalence would say an increase in government spending financed by taxation and borrowing would have no stimulus effect because individuals are forward looking and would expect any increase in borrowing to be matched with higher taxes later so to smooth their consumption individuals save now in anticipation of the higher future taxes.

It is just a theoretical idea, based on some rather big assumptions.

Ricardian equivalence is that a tax + spend budget is the same as a borrow + spend budget, not that a tax + spend budget has no effect.
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