"Ricardian equivalence" is the proposition that it does not matter whether government expenditure is financed by taxes or by issuing debt.

Question

Quizplus · Accepted Answer

According to the theory of Ricardian equivalence, individuals will adjust their consumption and savings patterns based on their expectations of future tax obligations or debt repayments. Therefore, in theory, government expenditure financed by debt would result in a corresponding decrease in private consumption and increase in private saving, offsetting the stimulus effects of the government expenditure. Thus, it is believed that the method of financing government expenditure does not have a significant impact on the economy in the long run.

"Ricardian Equivalence" Is the Proposition That It Does Not Matter