Lesson 1234 of 1524
The Impacts of Government Borrowing
The theory of Ricardian equivalence holds that changes in private saving will offset changes in government borrowing or saving.
Practice this chapterThe theory of Ricardian equivalence holds that changes in private saving will offset changes in government borrowing or saving. A change in any part of the national saving and investment identity suggests that if the government budget deficit changes, then either private savings, private investment in physical capital, or the trade balance—or…
The government need not balance its budget every year. However, a sustained pattern of large budget deficits over time risks causing several negative macroeconomic outcomes: a shift to the right in aggregate demand that causes an inflationary increase in the price level…
Ricardian equivalence — the theory that rational private households might shift their saving to offset government saving or borrowing. twin deficits — deficits that occur when a country is running both a trade and a budget deficit. Head Start program — a program for early childhood education directed at families with limited educational and financial resources.
Worked example
What does “Ricardian equivalence” mean in The Impacts of Government Borrowing?
- 1Use the wording this chapter gives for Ricardian equivalence.
- 2The book says: the theory that rational private households might shift their saving to offset government saving or borrowing.
- 3Do not use the meaning of twin deficits. That term means deficits that occur when a country is running both a trade and a budget deficit.
Result: the theory that rational private households might shift their saving to offset government saving or borrowing
Why. That is the meaning this chapter gives for Ricardian equivalence.
Do not swap Ricardian equivalence and twin deficits. Ricardian equivalence means the theory that rational private households might shift their saving to offset government saving or borrowing. twin deficits means deficits that occur when a country is running both a trade and a budget deficit.
Practice margin
This chapter
A fresh set from this chapter only. Choose 10 or 20. Multiple choice and fill-in, with no repeat inside the set.